High net worth individuals investing in listed stocks, currencies, bonds, and mutual funds using brokerage accounts (often referred to as Separate or Segregated Managed Accounts (SMA’s)) are common place. Many people are also familiar with SMA’s for futures and crypto so one may expect that giving access to individuals to private assets such as private equity, venture capital and individual company investments would be straight forward.
In our experience, and from industry commentators, there does appear to be healthy demand from wealth managers, private client services and life insurance providers to offer their clients an investment allocation to private assets. The asset class is mature, provides a level of differentiation, can be less volatile and provides returns that beat many of the other asset classes, so is highly attractive. In principle, there is also interest from private asset owners and fund managers to access the capital from such investors, and increasingly there are signs that this natural match between the parties is encouraged by governments and regulatory authorities that want to increase access to such private assets.
There is however a problem. The traditional structures for investing work well for larger investors investing substantial amounts but these are often costly to set up and run, impractical and in many cases not practicable where there are large number of individual investors with smaller investment ticket sizes. There are several options of how to structure this, but none are perfect. Examples include: setting-up an entity, such as a limited company or partnership, for each investment or for each investor; using an entity that caters for multiple investors into individual investments; pooling resources into a fund which invests into multiple investments over an extended period. These come with open questions such as how to resource the need for directors, who is responsible for accounting, filing statutory accounts and tax returns, and managing the audit; how to manage opening a bank account; who manages the shareholders register and inevitable changes therein. Too difficult for broad adoption and often too slow and cumbersome and costly for even the simplest of higher value (co)investments.
Mainspring’s Investment Platform is a solution, which provides a tax transparent infrastructure layer between the investor, the GP and the investment, so that:
- Investors get what they want: access to private assets such as direct investments into companies, private equity, VC and real estate funds, which are correctly accounted for, administered, reported on and held under safe custody on an individual investor basis.
- Investees get what they need: rapid access to aggregated capital investments, invested via a single contracting party so the administration of the investment, such as reporting and making payments remains simple.
The Mainspring Investment Platform uses a nominee structure provided by a regulated custodian which is specialised in the administration of SMA’s for private assets, such as shares in private companies, partnership interests in funds, and insurance policies written for the individual. The fund manager or GP establishes an investment management relationship with each investor and uses the investment infrastructure provided by the custodian to operate the platform. This can be put in place in a matter of days, and the vehicle (the nominee company) and how to hold investment funds (held via a client account), are instantly taken care of. In other words, the need to set up a new entity, open bank accounts, and then manage it for the life of the investment fall away.
There are other requirements to make this a suitable investment structure, such as how to flow investment funds from investors to the investee company, how to report to investors, and how to maintain control over the investment. All of which can be accommodated by Mainspring, which is a private asset focused custodian, which has the requisite FCA permissions, infrastructure and processes to safeguard client assets and monies, and to report to each individual investor on their holdings via a live reporting portal. While all the while the GP remains fully in control of the investment.
Mainspring Nominees Limited has been operating its private asset Investment Platform for almost a decade, and has established itself as the leading private asset custodian for venture and PE fund managers, with over 40,000 investors, family offices and their advisers on the platform.
The Fund manager’s perspective
For capital raising, the Mainspring Investment Platform, as SMA for individual investors enables the fund manager to extend access to the main private equity fund to wealth managers and private banks potentially significantly increasing the capital of the fund – especially for established fund managers that are likely to be of interest to such parties. Importantly this additional capital is drawn into the fund through a single aggregated additional investor to the LPA and the fund manager is able to hand off the burden of investor relations and reporting to the individual investors. Furthermore the structure enables confidence in the capital commitment to the fund whilst also limiting the impact on the IRR of the fund until such time as funds are actually drawn from the Investment Platform into the private equity fund.
For capital deployment, SMAs are also becoming popular amongst fund managers, in the face of a squeeze on management fees to provide lower cost investment structures for specific investment opportunities, maintaining control of co-investments as well as enabling fund managers to develop product and custom strategies without creating new complex Fund structures.
The traditional LP fund will remain the structure of choice for the higher value and relationship driven capital raising and lower volume investing with SMA’s serving higher volume capital raising and providing lower cost and speed and so enabling the fund managers to leverage their brand and deal teams to access management and performance fees that they may otherwise not be able to.
