Signals: Give Alternative Assets to the people

Alternative assets are exploding in popularity among retail investors, who are gaining unprecedented access to this historically cost-prohibitive asset class. The alternative asset boom creates a major opportunity for consumer-facing fintechs and infrastructure providers to challenge incumbents in a creative and more defensible way.

Alternative assets are investments that don’t fall in the conventional investment categories of stocks, bonds and cash. These typically include private equity, venture capital, hedge funds, real estate, commodities, art, antiques and collectibles.

The Alternative AUM more than doubled in the last 10 years and, based on an estimation by Preqin, this growth will continue at a very high pace in the future decade.

Traditionally only high-net and ultra-high net worth individuals have had access to these asset classes, but the Internet is relentlessly inverting the trend and opening up alternative assets to new socio-demographic groups.

Coinbase’s former CTO Balaji Srinivasan argues that based on the logical evolution of the capitalistic age, the job of 21th century will be that of the Investor.

I genuinely consider the statement a bit exaggerated, but still partially true. The natural evolution of the capitalistic age, is indeed to expand capitalism and market dynamics to basically any possible domain - as clearly presented by Carlota Perez in her foundational work “Technological revolutions and financial capitals”:

“Each technological surge represents another stage in the deepening of capitalism in people’s lives: each revolution incorporates new aspects of life into the market mechanism. “

The logical consequence of the statement above is a trend towards the financialization of everything: everything that can be a financial asset, is or will turn into a financial asset. And all these new financial assets will probably enter investors' portfolios as alternative assets.

Today predominantly wealthy and ultra-wealthy individuals invest in alternative asset classes and this is due to a host of reasons. Retail investors are either unfamiliar with alternative assets or don’t see them as investment opportunities. From a risk perspective, retail investors are often uncomfortable with new asset classes: they don’t know how to evaluate their expected returns or how to treat their risk. Finally, investing in alternative assets often entails prohibitively high tickets to entry, like the investor accreditation requirements seen in the US.

These conditions have severely limited everyday investors’ access to most alternative asset classes, but the Internet is inevitably changing this: as with more traditional  financial instruments that have come before, new companies are emerging to open a number of alternative asset classes to retail investors.

An army of new startups is working to enhance access to a myriad of investment opportunities that were once accessible only to the most affluent groups.

Venture capitalists usually refer to this process as the “democratization” of investing, but I don’t really like this hyped and vague political jargon blindly applied to business affairs, which should be probably replaced by “massification”: the opening of new distribution channels for these asset classes to less-affluent socio-demographic classes.

The verticals touched span from “pop” industries like music, art, and wine, to less exotic domains like vacation houses and private equity.

Art is one of the most used stores of value on Earth. The art market is estimated to have a total size of $1.7T with an annual volume of deals reaching $65.1B, according to the 2022 Art Basel and UBS Global Art Market report.

One of the most valued fractional investment platforms in the art market is Masterworks. Masterworks enables the fractional ownership of very expensive pieces of blue-chip art: Through Masterworks, anybody can buy a share of a Picasso or a Basquiat with an entry ticket of under 1000$.

Fractionalisation is a financial innovation through which investors can buy shares of financial assets despite them not being standardized tradable securities like company shares. This mechanism is facilitated by the existence of another key financial concept: securitization. Securitization is the conversion of an asset, typically but not exclusively a loan, into marketable securities, for the purpose of raising cash by selling them to investors.

Masterworks has so far raised $110 million and reached unicorn status in the final months of 2021.

A very similar concept is presented by Tessa, a Korean platform that made headlines in December 2021 when Tessa users bought all the available fractional shares of Banksy’s Love Rat in the span of 1 minute.

Goldman Sachs predicts that the music industry will double its 2017 market size to reach $131 billion globally by 2030. A significant part of this market will be constituted by royalties: fees that businesses and broadcasters pay to a recording’s rightsholders– typically its artist and their record label– in exchange for the permission to use it.

New platforms are now letting investors step in to buy these royalty revenues from artists and labels. Royalty Exchange, for example, auctions off royalty rights for artists including the likes of JayZ and Alicia Keys– whose song “Empire State of Mind” saw its 10-year royalty rights sold for just under $200K on the platform.

While Royalty Exchange focuses on offering investors sole ownership of these big ticket assets, others like SongVest and Anote Music allow for fractional ownership - splitting royalties into shares that investors can buy individually.

Platforms like Airbnb massively facilitated the development of the vacation rental market at scale. The size of this market is currently estimated to be $81B and projected to reach over $107B in 2026, primarily driven by a stronger penetration among younger demographics (Source: Statista). Now, new products are opening up profits from the rental property market to retail investors.

One platform, Here.co allows non-accredited US investors to purchase shares in vacation rental houses for as little as $100.

Fractional, Cadre and Arrived similarly give investors exposure to rental property revenues with varying product propositions, like bigger entry-level tickets or secondary markets for reselling shares in a house.

Another niche investment class that historically delivers consistent returns is wine. The Liv-ex Fine Wine 1000 - a market-wide indicator tracking wine collections around the planet - has seen impressive growth over the last few years, accelerated by new capital that flooded in during the pandemic.

Multiple companies are facilitating investment in shares of world-class wine collections in a model very similar to that seen in the previous asset classes. Investing in wine has traditionally entailed massive entry tickets and - even more complex - required access to distribution channels like auction houses or exclusive winemakers (usually French Négociants or Italian Cantine). Platforms like Rekolt, Vint and Cult are now allowing wine lovers to buy a stake in very expensive wine collections without channel barriers and for a fraction of historical costs.

A final category of alternative assets opening up to the masses is that of collectibles. Assets like historical artifacts, comics, watches, and vintage cars are notoriously difficult to acquire, but players like RallyRd, Koia, and Otis are opening them up to retail ownership by vetting these unconventional pieces’ condition, certifying authenticity, and issuing fractional shares to investors.

All the examples presented above present fresh and innovative investment opportunities for retail investors looking to diversify their portfolios and get exposure to risk that is uncorrelated with the stock market. More interestingly, they also represent a very strong product opportunity for consumer-facing fintechs and infrastructure providers around the world.

What the influx of cash in stonks, crypto, and NFTs over the past two years taught us is that consumers want to put their money towards doing fun stuff: in this context, investing in unconventional asset classes that they see as being aligned with their values and world-views.

The GameStop and AMC saga is the perfect epitome of this: relaxed monetary policies created cheap money, which raised people’s risk tolerance and appetite for speculative assets, but I don’t think this is the whole story. People demonstrated that they wanted to use investment as a social signal. They wanted to be part of a bigger story, they loved the narrative and decided to invest in the assets that delivered it.

In this framework, art, music, cars, watches, wines, etc. are all assets that present a much stronger narrative opportunity than an EFT or even a shit-coin. If N26 or Chime allowed users to purchase a Picasso with a few clicks directly from the app, they could generate a lot more engagement and buzz than they would by offering investment opportunities in traditional asset classes.

In addition, they would achieve a much more differentiated product that traditional banks and incumbents would find difficult to replicate as these offerings fall too far from their cultural values.

I haven’t seen any neobank working on this integration yet but, given the product stagnation and undifferentiation that most neobanks are experiencing, I hope some of them will embrace my input and offer some fun and profitable investment opportunities to their customers.

In a similar way, other fintech companies, data aggregators mainly, could leverage the explosion of these new asset classes to build data pipelines that could offer a better information level around them and an easier manageability of their risks.

Ultimately, given the obvious growing trend of alternative assets, it would be very wise for fintech operators to open their eyes and start building new solutions around them: this is where investors will go in the next decade.