Rafay Farooqui, Founder & CEO of Subscribe, a fintech firm enabling the digital transformation of private markets via a platform that serves as a central hub for fund managers, investors, and service providers to manage workflows and data for the entire life-cycle of an alternative fund investment, highlights some of the major trends in the private equity space…
What do you see as the major trends across the private markets industry today?
We see three trends playing out. First, there is a growing demand for alternative investments from all types of investors seeking to diversify their traditional investment portfolios and the demand is being met through a myriad of new products being developed by alternative asset managers. Second, we see the demand materializing in a continued focus on private credit and private equity secondary strategies, and new interest in infrastructure investments related to the climate and energy transition. Third, we are witnessing an energetic desire by all alternative asset management organizations to chart out their digital transformation strategy in order to keep pace with the aforementioned growth trends.
Let’s dive into the first trend, what role can alternative investments play in a traditional portfolio?
Including alternatives has the potential to increase risk-adjusted returns and provide a strong diversifier. We firmly believe that we have entered a different macroeconomic regime for investing, where the traditional 60/40 stock and bond portfolio must be enhanced to a 40/30/30 allocation including alternative investments such as private equity, private credit, real estate, and infrastructure.
As this shift takes place it is notable, that whereas institutional investors have been adopters of alternatives for many years, much of the new demand is pent up in the $70tn wealth management channel. Wealth portfolios are under allocated, and as they grow toward a 5-30% exposure to private markets, this will unlock $8-12tn in new industry assets. These new assets will contribute a large proportion of the anticipated growth of the alternative investments industry which, according to a recent study by Preqin, will hit $25tn in total assets by 2028.
As demand increases, where do you see LP interest for private markets in the coming 18 months?
We are seeing growing demand across the board as private market investments have the ability to increase the return potential of a portfolio and lower the correlation to the market as a whole. Specifically, investments in infrastructure, private credit, and private equity secondaries have been the focus of late.
Exposure to infrastructure provides a foundational platform in a portfolio, which is resilient to economic downturns and has high inflation linkage due to its inelastic demand for assets such as ports and toll roads. Moreover, the sector has secular tailwinds associated with decarbonization, digitalisation, de-globalisation and demographics.
The private credit market now stands at $1.5tn with funds providing the lending that was traditionally associated with banks. As the economy begins to slow though, an increase in defaults is expected. Investors should look for exposure to those funds with companies that have defendable market share, and the negotiating power to pass costs on to the consumer and preserve profit margins, such as asset based lenders in aviation, healthcare, and mortgages, and avoid discretionary and pro-cyclical businesses.
Finally, interest in private equity continues with 87% of US companies with revenues exceeding $100m still privately owned. However, with the rising cost of debt and ongoing economic uncertainty causing a slowdown in primary private equity fund raising, investors are seeking exposure with a margin of safety through private equity secondary funds, which offer exposure to high quality funds at discounts with no J-Curve, shorter illiquidity, and investments reflective of current market valuations.
So given all this growth and interest, what are investment organizations doing to keep up in terms of digital transformation?
Faced with this growth, there is a critical need within the private markets industry for new, robust, and digital market infrastructure for centralization, transaction automation, and complete data. The need is being met by innovators like Subscribe focused on cutting-edge enterprise solutions.
Solutions must support the entire investment lifecycle at scale – from education, fund formation, distribution, transactions, liquidity management, to reporting, and portfolio rebalancing. We call this the “Pre-Trade, At-Trade, and Post-Trade” continuum.
As $12tn dollars flows into private market investments, the current operating infrastructure is buckling, and the professionals tasked with managing it are overwhelmed. It is a daunting task for large complex private markets firms, and it requires them to dedicate meaningful financial and human capital resources toward the effort to reevaluate their tech stacks to support the entire continuum. Legacy tools and platforms are just not up to the task, as many have built copycat and repurposed solutions that miss the mark repeatedly because their firms lack an engineering DNA and culture. So alternative asset managers need to choose their software partners carefully.
Subscribe has become the standard for centralization of any organizations alternatives program. What are the biggest drivers of that growth?
I have the unique experience of having founded and developed two alternative investment fintech firms – CAIS, which is a distribution and marketing firm helping alternative asset managers access the US wealth market, and Subscribe, which is on its way to becoming the NYSE and Amazon of the private market industry as a whole.
Something Amazon founder Jeff Bezos said at an event years ago has stuck with me – that Amazon’s success “would not have been possible had the credit card and postal service infrastructure not been in place for them to leverage.”
In the same way, the private markets industry has an Amazon-like opportunity – but a key developmental difference is most have jumped to building a marketplace with SKUs, despite the lack of a robust checkout and logistics system. This is what Subscribe has built and delivered for any fund and every investor, anywhere in the world.
Digital transformation for every organization is now a necessity – not a nice to have. We have been growing 100% year over year as this need is becoming universal. Demand is off the charts for our cutting-edge technology – as it simply did not exist before – and is now a critical contributor to the success of any organization’s alternatives program.
Rafay Farooqui is Founder and CEO of SUBSCRIBE, a leading enterprise software company that is powering alternative investments for institutional allocators, sponsors, and service providers. Prior to SUBSCRIBE, in 2009 Rafay co-founded CAIS, a fintech company offering a menu of curated alternative investment funds to wealth management firms.
SUBSCRIBE, the leading order management system for alternative product transactions, allows any LP, GP, or SP to compliantly mobilize and digitize their investor onboarding processes and fund subscription documents in minutes. This technology ushers in the digital transformation of the private markets, and leads the pack of E-SubDoc platforms available in the market today by transacting billions of dollars’ worth of subscriptions. It serves over 4,000 institutional LPs, 700 GPs, and 4,000 of their fund offerings, and is integrated with over 400 service providers, from law firms and fund administrators to capital introduction and placement agents, among others.