Among the first firms to launch an Eltif2 strategy that allows retail investors to access private equity, Berlin-based Moonfare said it plans to create a dedicated secondary liquidity mechanism that enables investors to unwind their holdings before the fund matures. Liquidity, however, is not guaranteed.
The matching mechanism, a new element in the market for European Long Term Investment Funds made possible under the EU’s updated Eltif regime that took effect on 10 January, is designed to overcome concerns that investors won’t be able to sell their investments because of a lack of liquidity.
As a 2.7 billion euro private equity platform, Moonfare has partnered with private banks and wealth managers worldwide to provide private equity investments to high net worth investors. In Luxembourg for example it works closely with Quintet Private Bank, which also includes TheodoorGilissen in the Netherlands and Puilaetco in Belgium. Clients at Berenberg and Fidelity, a minority stakeholder in Moonfare, also can use the platform.
Moonfare’s existing platform includes a secondary market for eligible investors in private equity. Through this platform, it hosts a semi-annual digital secondary market, a structured auction that enables professional investors looking for early liquidity to sell their allocations to other members or its institutional partner, Lexington Capital, a 75 billion dollar New York-based specialist in ‘secondaries’, as divested private equity investments are known.
Eligible retail investors only
Moonfare now wants to expand its platform to the European Eltif market where retail investors can also take up long-term investments in private assets. People familiar with Eltifs also regard the use of such matching mechanisms as a suitable alternative that could overcome the widely debated liquidity challenge, compared with the disputed liquidity table in the ‘Level 2 RTS’ draft that the European Commission is currently considering.
“Our mission has always been to democratise private equity and the Eltif 2.0 regime allows us to open up the asset class for eligible retail investors,” said Moonfare founder and CEO Steffen Pauls (photo) in a statement. “Now, more than ever, private investors have access to private equity through the Moonfare platform.”
Moonfare is one of the first firms to launch an Eltif2 strategy. Targeting eligible retail investors across Europe, the firm said its strategy will hold direct stakes in third-party private equity funds, as well as co-investments in profitable companies. The minimum ticket to invest via Moonfare is 10,000 euro. Its Eltif will be an closed-end fund which does not require liquidity pockets. As a result, the risk-return will be based on the actual value of the underlying assets, which in turn generates greater expected returns.
KKR experience
Pauls, a former German director at global private equity giant KKR, underlined the need for these funds to deliver performance on par with other private market access points. Drawing on his experience from a firm made famous by the 1989 Wall Street saga “Barbarians at the Gate,” he also highlighted the need to provide adequate protection and education for retail investors engaging with Eltifs.
Moonfare said its Eltif 2.0 strategy will largely be based on buyout transactions in established and profitable companies, alongside opportunities in the growth space. Eligible retail investors will be able to invest alongside institutional investors and managers with decades of experience and with a proven track record of significantly outperforming the S&P 500 in funds that usually have minimum tickets of 10 million dollars.
Moonfare said it will take advantage of the ability under the Eltif 2.0 regime to use fund-of-funds structures with their potential for a higher level of diversification, and thus potentially more stable returns, for investors likely new to private market investing. Exposure will be highly diversified across sectors, geographies and managers, with an expected 50+ underlying portfolio companies, it said.
Liquidity still being discussed
When it comes to making private equity investments to retail investors, liquidity, or better, the lack thereof, is regarded as a major obstacle. Financial regulators fear that private investors, unlike institutional ones, may be caught out in a hard way if they are not able to sell their allocation before a private fund matures, which usually takes eight to ten years.
A debate among EU regulators on how to treat liquidity under the updated Eltif2 regime has yet to be concluded. The European Securities and Markets Authority, Esma, just before Christmas tabled a proposal that the industry considers as unworkable, because it calls for a mandatory 12-month notice period for fund redemptions. Shorter notice periods are possible if a fund allocates a portion to liquid listed investments. Investors thus would incur relatively high fees for private equity for a fund that also invests in listed assets.
The European Commission is currently reviewing the Esma RTS proposal and is due to communicate its opinion during the coming weeks. Legal experts familiar with Eltifs meanwhile have said the use of liquidity matching mechanisms, such as now announced by Moonfare, could offer an alternative approach to the liquidity challenges.
Moonfare’s platform is currently being used by some 4,000 clients in 22 countries.
Further reading on Investment Officer:
- Eltif 2.0: Brussels mulls new path towards RTS
- Eltif 2.0: Industry urges EC to adopt ‘correct’ standards
- CSSF ready to conditionally approve Eltif 2.0 applications