While digital tools to streamline due diligence and client management workflow for private investment managers have caught on, digital capital raising tools have failed to gain widespread traction.

So far, the adoption level for digital capital raising tools in the private real estate world – and for alternative investments in general – has been low to zero, says Andrew Baum, emeritus professor of the Saïd Business School at the University of Oxford.

“They are not used very much at all,” says Baum, who invested in a digital capital raising platform five years ago that has since folded. He is now working on a prospective venture capital investment in a digital capital raising business.

Digital capital raising is “an opportunity waiting to take off,” but so far managers have preferred to rely almost exclusively on their own fundraising machines. “The Blackstones of the world have their own capital raising teams, and smaller shops with good track records to tout have enlisted placement agents like Lazard, which are dominant,” Baum says.

“The digital platforms have yet to find their way down to the fund managers who would choose to save on travel costs and at least get to the third presentation having used digital means of presentation.” However, Baum does note that the fund managers and their agents are relying more and more on Zoom meetings.

Pensions as influencers

What needs to happen for a digital fundraising tool to break through? The initiative has to come from a group of influential pension funds that come together to endorse one platform, perhaps because of carbon footprint concerns, Baum says.

“The investors need to say that their ESG policies are resulting in them traveling less and they don’t think the managers should be traveling as much to come and meet them,” he adds. The winning technology will probably take the form of a database of investors coupled with a database of managers, with sets of criteria both for what the managers offer and what the investors are seeking, Baum says.

A simple matching tool could then create a long list of potential managers for each investor. If the investor wants more information on a potential manager/investment on the list, the manager in question could provide the investor with access to a data room with details about the investment offered.

“This is just a tremendous opportunity for technology to provide a matching platform, just like a dating agency,” Baum says.

Such a scenario would probably require venture capital committed to the idea, he says. The difficult step would be getting traction from the pension funds and other large institutional investors, he adds. Getting the managers to operate as a group behind a single platform will certainly also prove challenging.

Another option might be to start with a database of fund managers. Then, once enough data has been amassed, it would be possible to start offering a matching service to managers in the database that are fundraising, perhaps offering the investment vehicles to growth pension funds through a team of people who know the pensions well, Baum says.

“This is just a tremendous opportunity for technology to provide a matching platform, just like a dating agency”

Andrew Baum
Saïd Business School,
University of Oxford

“It is just a very difficult job corralling lots of managers to start buying a product which gives the platform its cashflow, and very difficult to get pension funds to commit to doing anything, particularly if it involves any expenditure,” he says.

Lessons from the bond market

Other lessons for building a digital capital raising tool might come from software providers that first establish themselves with workflow tools between institutional investors and capital raisers. One such provider for the investment-grade bond market, Origin Markets, has no intention of creating a digital capital raising tool, but its leaders have considered expanding into a platform that institutional investors could access, says Raja Palaniappan, chief executive and co-founder of the London-based start-up.

For now, Origin has focused on getting its main customers – the borrowers and investment banks – on board, Palaniappan says. For those customers, Origin pitches itself as a cost-reduction and efficiency tool. Borrowers get access to a larger pool of dealers and, by extension, a larger pool of investors. And the banks retain their intermediary role between borrowers and investors.

“It is a lot faster for us to cover the market by getting all the investment banks on board for these,” Palaniappan says. “We have 20 that cover a huge proportion of the deals already, whereas to cover an equivalent number of investors, we would probably need 3,000.”

“Everyone is trying to figure [how to get investors onto one site] out. And no, no one has had the solution”

Trilliam Jeong
WealthBlock

“Right now, we don’t put the tool in the hands of the investor themselves, but we put it in the hands of the fixed income sales force of the investment banks,” he says. “They can put their search criteria into our system and we give them a short list of which issuers match that criteria.”

Launch plan

The main challenge in creating a successful digital capital raising tool for private investments isn’t in the technology, but in convincing investors to come to one site, says Trilliam Jeong, CEO and founder of WealthBlock, provider of know-your-customer, accreditation, customer relationship management and document signing digital tools to investment managers. “Everyone is trying to figure that out. And no, no one has had the solution yet,” he says.

Jeong plans to launch a private-investment digital capital raising platform for qualified investors by the end of the year. His approach will be to attract qualified investors with free tools, such as a comprehensive search engine where investors can identify potential private investments and reach out to managers for more information. Other free tools will allow the investors to screen potential investments, to set up data rooms to share with other investors and to create due diligence questionnaires to send to the managers of their choosing.

So far, on the manager side, he has created portals for every manager registered with the SEC – about 9,000 in all – and will offer each one the opportunity to claim their portals and provide more detailed information for the search engine for free, plus access to other digital tools. He is also inviting investors to claim their portals, starting with a database of about 10,000.

“On day one, the network has little value,” Jeong says. “Therefore, I provide a utility value to hook them in and as the network grows and it starts to carry way more value. But that utility value doesn’t go away.”

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