FinTechs collapse, Blackstone grows, and #FireGaryGensler trends

Welcome to the Weekend Edition

When we decided to launch our free newsletter, Private Capital Insider, we had a simple goal in mind…

Help our readers learn how to accomplish their financial goals by diversifying into private market opportunities.

During the week, you’ll continue to get more investor education from Jake Hoffberg on how to play what he calls “The Great Game of Private Capital.”

But we also promised that this newsletter would be your “passport” to the wider world of Private Capital.

That’s why every Saturday, we’re going to send you this “weekend edition” that gives a look back at all the most important news stories and trends in Private Capital.

Generally speaking, here’s what we’re tracking as we search new opportunities to list on the Equifund Crowd Funding Portal.

The Gameboard: What is the current state of the game in banking and capital markets? Who are the active bank (and non-bank) lenders, financiers, and investors?

As liquidity increases (decreases) along with the cost of capital, this creates enormous disruptions across both Public and Private markets.

Understanding how the Banking and Capital Markets Ecosystem works is key to understanding why certain investment opportunities are available for small balance checkwriters.

The Players: What are the big names in Private Capital putting money into?

There’s a reason the financial media is so interested in what the so-called “smart money” is doing. While we’ve clearly seen that even “smart” money is capable of horribly dumb investment decisions…

In the Great Game of Private Capital, they are the ultimate insiders who have the best information about what’s really going on. But most investors have don’t know much about firms like Blackstone (which we’ll talk about today).

Our goal is to keep you in the loop on what’s happening with America’s largest asset managers and how their moves drive the broader Private Markets.

The Scoreboard: What asset classes/strategies are working right now?

Here’s the nice part about Public Markets. If there’s something “hot” going on in the markets, its relatively easy to put a short-term trade on and hope for the best.

Private Markets are different. We’re probably going to be in a deal for 2-5 years. This means the hot Private Capital strategy you see in the news might not make sense to enter any more today.

That’s why we’ve got to “read the tea leaves,” and decide if we think the reported returns are actually real, if the trend will continue, and is that a strategy we can reasonably implement with a retail shareholder base.

And last but not least…

Rule Changes: What’s going on in Washington, and what impact new policies and regulations have on either Private Capital as a category (or retail investor access to it).

Every now and then, the “referees” decide to throw a curveball, and change up the rules of the game.

Sometimes, the government decides they want to spur market participation by offering tax incentives or looser regulations…

Other times, they propose new policies and regulations that only serve to entrench the incumbent's market position (courtesy of the “revolving door” and lobbying).

Our mission is to take all of this information into consideration as we look for our next opportunity.

Let’s dive in,

-Jordan Gillissie

CEO, Equifund

The Gameboard

The Collapse (and consolidation) of FinTech 

Over the past 10 years, we’ve seen arguably one of the most bizarre banking and capital markets environments in history.

For nearly a decade, investors existed in an environment where capital was cheap and plentiful, valuations always went up, and there was always a “greater fool” to sell to.

And in that span of time, a generation of investors and issuers have been operating inside of a completely warped version of how “actual finance” works.

In a falling interest rate environment that trends towards zero, this sets the stage for increasing market cap through pure financial engineering and arbitrage.

It used to be that you could put in $1 of equity, borrow $2-$3 of debt for basically nothing, and expect to make an easy 20%+ IRR.

According to Bain Capital, multiple expansion – not margin expansion or revenue growth – has been the primary driver of returns.

But with interest rates approaching 5%... the cost of capital has gone up, liquidity has dried up, investors are valuing profit over growth, and there’s no more “Free Lunch” in multiple expansions.

Now, these nonsense “Unicorns,” who still haven’t figured out a business model, are all collapsing under the weight of “financial markets acting normally.”

Nowhere is this more clear than the bloodbath we’ve seen in the much hyped “financial technology” (FinTech) sector where startups with unproven business models rely on endless cheap cash…

And apparently, these so-called “neobanks,” seeking to disrupt legacy banking – who aren’t actual banks, because they lack a bank charter – are too heavily reliant on the incumbent banking and capital markets infrastructure to function at all.

Without a bank charter, if they want to lend to customers, they must pay fees to other banks, or find investors to fund their loans.

This works great when the cost of capital is ~0.08%. Not so much at ~5%.

What does this mean for our Private Capital Insider readers?

If history is any guide, the most recent bank failures will accelerate the current consolidation cycle within banking…

And access to capital for early-stage companies will only get harder.

Bear Case: This is the beginning of an “Innovation Ice Age,” as investors flee to safety and capital markets tip further in favor of “Big Business.”

Flush with cash, the winners of today will be the winners of tomorrow, as they sift through the rubble and pick up anything valuable for pennies on the dollar.

But what happens if someone “arms the rebels?”

Bull Case: We see a Cambrian Explosion level evolution in early-stage companies coming into the retail channel for capital.

What do you think? Let us know by answering the poll below

The Players

Blackstone’s Quest for Retail Money

Today, Blackstone – with $991.3B in assets under management (AUM) – is the world’s largest alternative asset manager, and the world's largest corporate landlord.

In 2018, about 15% to 20% of Blackstone Group’s annual fundraising came from retail investors. According to Joan Solotar, head of private wealth solutions at the firm, “There’s no reason that ultimately [retail investors will] account for half the assets we manage.”

Two of Blackstone's prized and fairly young funds aimed at retail, the Blackstone Private Credit Fund (BCRED) and the Blackstone Real Estate Income Trust (BREIT), have amassed $57 billion of assets and $69 billion of assets, respectively.

According to Blackstone, BREIT has posted some rather impressive gains since inception: Every $100k invested would be worth ~$202k today (before fees and taxes).

But now – after six months of halting redemptions as retail investors flee for the exits – their retail-focused strategy has come under fire.

However, that hasn’t stopped Blackstone from raising $30.4B for its latest real estate fund, Blackstone Real Estate Partners X – the largest “Real Estate Drawdown Fund” ever!

• [Note: A drawdown (aka capital call) is the legal right of a private equity firm to demand a portion of the committed capital from the limited partners to pay for a newly identified investment or expense.]

To be clear, we’re not saying you should or shouldn’t invest in any of these retail-facing “alternative” investment products.

However, we will almost certainly dedicate an issue to understanding how these products are built, the impact of fees on your potential returns, and the risks you may be unaware of.

Rule Changes

#FireGaryGensler

In case you missed it, Wall Street’s top cop – SEC Chairman Gary Gensler – was hauled in front of Congress on Tuesday for a Twitter-worthy highlight reel of getting raked over the coals by the GOP-led committee…

And Ohio Congressman Warren Davidson has formally presented legislation calling for the removal of SEC Chair Gary Gensler and the restructuring of how the SEC is governed.

In a statement, Davidson attributed Gensler’s “failure to protect investors and abuses of power” as reasons for the proposed overhaul of the regulatory body.

This is a huge deal for the American Capital Markets as a whole!

SEC Chairman Gary Gensler has been under fire by retail investors ever since he joined the commission in 2021…

And the growing hatred of Gensler from retail investors certainly isn’t unwarranted.

In 2022, retail investors petitioned to fire the SEC Chairman due to the SEC’s failure to enforce regulations that would level the playing field between retail investors and institutional investors.

The retail community has also argued that hedge funds and market makers have too much power and take advantage of investors through Payment for Order Flow (PFOF), dark pool trading, and suppressing the market through illegal naked short selling.

And it’s not just retail lining up against Gensler. Wall Street has been less than thrilled with Gensler’s proposal to overhaul the US trading system.

Some are already threatening litigation if the proposal goes through.

“Ultimately, it’s going to end up, unfortunately, sadly, probably in litigation [if Gensler] decides to go down this road,” Virtu CEO, Doug Cifu, said in an interview at the Securities Traders Association of New York conference on March 27th at the NYSE.

To be clear, we’re not here to prosecute Gary Gensler. But a shakeup in the SEC has obvious implications for the future of retail access to capital markets.

But I’m interested to find out what you think.