By: Rishi Chohan, U.S CEO at GFT
Individual investors are estimated to represent $80 trillion of global investments, but only about 1% to 2% of those funds are going to alternative investments. This is due, in large part, to the fact that alternative investment firms have traditionally raised money from institutional investors—pensions, endowments, family offices and others–not from individual investors. As a result, individual investors remain an underutilized source of private capital, currently holding only 16% of assets under management (AUM) in alternative investment funds.
For firms that are under pressure to grow, relying disproportionately on pensions, endowments and other institutional investors introduces an artificial ceiling, considering these sources are only able to allocate a designated percentage of assets to private capital and other alternative investments. This has made individual investors a very attractive growth source.
But for investment firms set up to work almost exclusively with institutional investors, tapping into the significant wealth held by individual investors will require a major shift from the legacy systems and processes that supported their traditional model.
Here’s a look at the three main factors that will influence their success.
Individual investors need to understand the opportunities available to them through private capital.
Fifteen years ago, most investors didn’t even know what cryptocurrency was, let alone view it as an attractive investment vehicle. Today, nearly 16% of the U.S. population has invested in, traded or used a cryptocurrency. This shift is due to several factors, but it mainly resulted from investors simply learning about the currency, its benefits and risks, which increased their comfort making an investment.
Now is the time when a similar shift needs to happen for alternative assets like private equity, venture capital and real estate funds. Most individual investors have never invested in these private capital offerings. As a result, attracting their wealth will need to start with helping them understand the types of private investment opportunities available, how they work, and how they differ from public markets. Individual investors also need to learn the benefits of investing in private capital, so they are attracted to the offerings.
Education can take years, so starting now, even before firms have the infrastructure and technology to service the segment will pay off in the long term. By starting market education early, firms will ensure that once regulations and their technology stacks are ready for prime time, investors are also ready with their capital in hand.
Digital foundations will lay the groundwork for new digital experiences.
Most alternative investment firms still rely on legacy systems for their operations. These systems have worked thus far to serve institutional investors–but they aren’t built to meet the scale or digital experience expectation that will be required to reach individual investors.
For example, when a pension wants to commit to a new fund, it is accustomed to hundreds of pages of paperwork, including PDFs, over the course of the investment process. Individual investors, on the other hand, are mainly accustomed to basic applications on their phones that enable investments with the click of a button, so paper-heavy processes can be off-putting.
To create more digitally-native experiences, though, firms need to revamp their underlying legacy technology systems. This often involves upgrading disparate, on-premises systems to a centralized cloud ecosystem where data can be stored and interacted with across the firm.
Once all data is centralized in a single cloud environment, then firms can create user-friendly, digital experiences, similar to the applications investors are already used to. Additionally, centralizing all this data in one location enables the firm to examine investor trends broadly across the organization, making more informed business decisions.
AI provides the scalability needed to reach the masses.
It can take thousands of individual investors to raise the same amount of money as a single institutional investor. For firms, this requires a fundamental change in how they operate to manage this many investors efficiently, and at scale. This is why AI must be an integral part of evolving their model.
Even if firms wanted to continue handling investors manually, the time and resources it would require to do so don’t make financial sense. The good news is that introducing AI can be a gradual process, not one that happens all at once. The best place to start is identifying multi-step processes that are both heavily manual and time-intensive.
In the case of alternative investment firms that want to open their doors to the masses, an obvious place to start is the day-to-day management of this new influx of investors. More investors, after all, will also mean more inbound requests and questions. Having investor relations professionals answer all of their questions individually, the way they would for institutional investors, would require constantly increasing headcount and risk slow reply timelines that could make investors want to pull out their funds.
Operationalizing this process can easily be solved by deploying a highly customized AI chatbot, trained on the firm’s processes and deep expertise. This would enable the firm to scale responsiveness to meet the needs of its new model, allocate staff hours more efficiently, and keep investor relations teams focused on answering complex questions and inquiries.
Another easy win for AI is streamlining back-office reporting functions at the scale necessary to cater to individual investors. When a firm is dealing with more investors, the amount of tax and compliance paperwork also skyrockets. AI is uniquely qualified to pull mass amounts of data from multiple sources, at regular intervals, and deliver whatever outputs and formats necessary. While employees still need to check these documents before they’re finalized, AI can cut down a task that could have taken hours per investor to mere minutes.
Individual capital is the next frontier for firms that want to attract more capital and grow beyond the limitations of institutional investments. But old approaches for doing so won’t support the new model necessary to capitalize on this otherwise largely untapped source of capital.