Tapping $42trn of individual investor capital

Nextvest, a direct co-investing platform could open the floodgates for the vast amount of wealth sitting among retail and family office investors, who have traditionally faced limited access to private equity.

In an industry that has been traditionally funded by large institutions, accredited individuals and family offices may now have a new entry point into private equity co-investments.

Nextvest, a New York-based fintech startup founded by former Boston Consulting Group consultant Thomas Krenik and Goldman Sachs SSG (special situations group) investor Harvey Powers, is aimed at bringing sophisticated retail investors and family offices into the private equity deal-by-deal space. The startup provides a platform on which vetted private equity funds provide direct co-investment opportunities in the lower mid-market to a network of investors.

This is done primarily through a network of fundless sponsors that show co-investment opportunities to the investors on the Nextvest platform. Before any sponsor’s deal is shown, Nextvest vets the transaction for quality of underwriting. Most recently, investors participated in a $50 million funding round for electric vehicle charging network Chargepoint via Nextvest. That opportunity was sponsored by former Kleiner Perkins partner Michael Linse.

Mid-market firm Diversis Capital founder Kevin Ma is another sponsor who uses Nextvest and has noticed a shift in interest toward deal-by-deal investing.

“We believe more and more funds will elect to go deal-by-deal versus raising committed capital over time,” Ma said. “Although many institutions and sovereign wealth funds have realised the value of deal-by-deal investing, the vast majority of them do not yet participate in said transactions.”

Nextvest has launched at a time when mega private equity funds have been trying to find ways to reach the retail network. Last year Partners Group and Pantheon Ventures launched products with the goal to tap into the defined contribution pension fund markets as a way to service individual investors, as reported by Private Equity International.

The difference between Nextvest and the offerings from Partners or Pantheon is they are fund-of-funds, focusing on primary and secondary stakes into funds, whereas Nextvest provides direct access to private equity deal flow. And because investors circumvent funds entirely by exposing themselves directly to deals, they don’t pay fees on committed capital. Rather, all capital via the Nextvest platform is immediately deployed into deals, eliminating any fallow period where the money has been committed but isn’t actively at work.

According to Krenik, the platform will not assist existing PE funds with their efforts to raise commitments into their blind-pool structures, which typically have low transparency and a 10- to 15-year holding period. This long-term time frame with limited control and transparency is one of the reasons why barriers to private equity have been too high for retail and family office investors to jump over.

“The historic focus on the institutional investor leaves billions, if not trillions, of dollars on the table,” Krenik told PEI.

He added that most private equity funds target billionaire families when raising capital, even though a huge amount of cash sits outside of the top 0.001 percent of the US population by wealth. For example, the top 10 percent of US families possess altogether $42 trillion, which is barely tapped by private equity, according to the National Bureau of Economic Research.

“Translating those small fortunes into private equity investments could easily increase the size of the industry by hundreds of billions of dollars,” Krenik said. The US Securities and Exchange Commission estimates more than 12 million households in the country qualify for accredited investor status, meaning if each invested $10,000 into private equity annually, the industry would grow by $120 billion per annum.

There is already a venture capital counterpart of Nextvest. Angelist began originally as just a social network of angel investors and grew to become a platform for funding early-stage startups. It has connected 3,379 investors to 441 companies that drew in $162 million last year.

The primary difference, Krenik said, comes down to due diligence. Angel investing is historically a very risky asset class with minimal diligence, whereas private equity focuses on thorough diligence for companies with long-proven business models. To fulfill this, Nextvest ensures that each fund provides institutional-calibre diligence information to each investor, who can commit as little as $25,000 per deal.

“By shifting the dynamics of private equity from being fund-based to being deal-based, co-investing may have the potential to democratise access to private equity for more investors than ever before,” Krenik said.