Technology is playing a huge role as the private capital markets evolve. This is evident in the growing ease of product distribution that results in an increase in market transparency. Aspects of investing are becoming automated with the advent of robo-advisors. Within the hedge fund space, quant-based strategies utilize computer-generated algorithms to place trades and form trading strategies.
Ease of distribution is a pretty straightforward concept. The increase of distribution through technology is a springboard for virtually all aspects of business today. For example, the ability for Uber to create a centralized distribution network for both passengers and taxi drivers creates an engaging and simplistic marketplace only possible through advancements in technology. The ability for Uber to scale so quickly really lends evidence to the idea that advancements in distribution eventually create a scalable ecosystem. Perhaps industry disruption doesn’t have to come from a technical breakthrough, but from the creation of an ecosystem through technological innovation. Facebook is a prime example of value created through the scaling of an ecosystem. The technology isn’t what is disruptive – look at all the social media companies that have died out over the last ten years. The disruption stems from mass adoption of the ecosystem followed by the ease of information dissemination.
Transparency is an outgrowth of technological innovation, particularly in a traditionally opaque industry like the private capital markets. Through an increase in distribution, investors can more easily access and diligence investment opportunities. This results in the opening up of the market to more potentially qualified investors. Regulatory initiatives have really contributed to a broadening of distribution possibilities. The passage of the JOBS Act broadened the ability for issuers to market private placement opportunities digitally. As a result, investors can access these opportunities with increased ease. Under the new rule 506(c), an issuer may use general solicitation to broadly advertise a capital raise. With a 506(c) raise, all investment materials can be made visible to the public through digital channels, enabling issuers to take advantage of the ability to market the investment to a digital audience. This also means the issuer has the option to use social media to advertise the private investment opportunity through outlets such as Facebook, LinkedIn, and Twitter.
The advent of robo-advisors and the use of technology to make investment decisions is an outgrowth of increasing digital connectivity. The millennial generation doesn’t mesh well with the old model of investing that includes financial advisors, intermediaries, and a generally opaque environment. The recent financial crisis hurt many investors, causing young people to question the efficacy of the financial markets and the finance industry. The sub-prime mortgage dealings and interest rate manipulations certainly left a bad impression on young professionals at the time. As a result, the financial business is starting to adapt and cater to a more digitally oriented audience that demands transparency. These new investors are likely to invest in products that can be customized and tailored to suit their specific needs or requirements. This is how these simplified but effective robo-advisors are capturing a young professional demographic.
The mistrust of traditional financial products also creates an environment where investors are more willing to consider alternative investments. This confluence of factors paves the way for disruption in this space. In the alternative investing world, there is increasing evidence that these investments can be a beneficial diversification and alpha generation tool for an investor’s portfolio. As technology brings increased distribution and transparency to these products, investors that normally couldn’t or wouldn’t allocate to alternatives will start to shift capital to this asset class. Qualified investors and institutions will increasingly allocate to alternatives, as the increased distribution of opportunities will drive greater interest and capital flows to this space.
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