Earlier this week, one of the most prominent visionaries in Hedge Fund investing passed away. Julian Robertson, a pioneer of the industry, died at age 90. He leaves behind a pronounced legacy, transforming the Hedge Fund industry into what we know it as today.

Born and raised in North Carolina, Robertson started his career after leaving the Navy in 1957. He began working in the investment management industry in the late ’50s, eventually rising from a retail broker to taking the lead at an asset management firm. By 1980, he founded one of the first Hedge Fund firms, Tiger Management.

Starting the company with $8 million, he eventually turned the fund into a $22 billion fortune by the late ’90s, earning an astounding 32% average annual return during that time period. Just as remarkably, Tiger Management only showed losses in 4 out of 21 years that the fund operated.

Robertson made excellent market calls during his leadership of the fund, such as predicting the dot com bubble near the end of the last millennia. However, the fund’s performance began to suffer in its last years, with Robertson candidly remarking that he could “no longer make sense of the markets”. Tiger Management closed in 2000, but his legacy defined the Hedge Fund industry for years to come.

After his retirement, Robertson continued to make personal investments, such as shorting subprime mortgages during the Great Financial Crisis of the late 2000’s. He also mentored and funded dozens of former analysts of Tiger Management, who went on to start their own Hedge Fund companies.

These firms affectionately became known as “Tiger Cubs”, a testament to the revered position that Robertson and Tiger Management continued to hold in the industry. Today, some of the more prominent of these funds are Lone Pine, Coatue, Viking, and Tiger Global.

Through his firm and the Tiger Cubs, Robertson influenced untold billions of dollars of created value for investors. Without his vision and savvy market-beating disposition, modern Hedge Fund investing would not be near what it is today.

His impact is also felt beyond a stellar investment track record. During his lifetime, Robertson donated more than $2 billion to charity. He was part of the Giving Pledge, which encourages extremely wealthy individuals to contribute a significant amount of wealth to philanthropic causes. He also founded the Robertson Scholars Leadership Program, donating millions to fund scholarships for students of Duke and UNC.

Because of visionaries like Julian Robertson, Poolit exists today. Thanks to his revolutionary approach to investing, he continues to influence investors so they can build their wealth and realize their potential.

The Poolit Team

Sources

https://www.investopedia.com/terms/j/julian-robertson.asp

https://www.nytimes.com/2022/08/23/business/julian-robertson-dead.html

https://www.reuters.com/markets/us/billionaire-hedge-fund-manager-julian-robertson-dies-90-spokesman-2022-08-23/

Building Poolit requires our team to stand up both a tech company and an investment firm. While we have many external relationships that have helped fuel our development, I realized quickly that we needed someone skilled in operations to help foster our organizational growth and manage these external relationships. I knew this person had to be extremely versatile, a rigorous problem-solver, and full of grit — standing up multiple highly regulated companies (we are already at four!) is a tall task for scaled organizations and an even taller order for an early company.

We met our match with James. James dropped out of high school at 17 to join the military after the tragic terrorist attacks on September 11th. He spent 9 years as an infantry soldier in the Army and rounded out his experience with another 4 years as an intelligence officer. After leaving active duty service, James graduated magna cum laude from the University of Southern California and went on to earn advanced degrees at both Harvard and Stanford. He has worked in venture capital investing which led him to VIPKID where he led US Strategy & Business Operations before serving as Chief of Staff. James helped guide the company as it experienced 30x growth — becoming one of the most valuable edtech companies in the world.

When I first connected with James, I was instantly impressed by his ability to balance strategic thinking with tactical execution. I could sense that he had an incredibly high EQ as we talked about situations we would partner to tackle should he join the team. I also knew that he would be able to cover everything else — from organizing HR processes to instilling a data-driven organizational culture guided by our OKRs and KPIs. Every member of our team was impressed with James and every reference check confirmed: James was the perfect fit. His requirements for any company he would consider joining? He wanted to be at a company with a very large, inspiring mission; a high degree of execution ability; and to be working among teammates he could deeply respect, trust, and with who he could have a whole lot of fun.

We’re glad we were able to meet his high standards. James has been on the team for a month and every day I am thankful to have him as a partner in building Poolit. From managing our fund registration process alongside our General Counsel to helping lead partnership outreach efforts, James has multiplied our organizational capacity and has been integral to our success so far. His background in education has also been incredibly valuable as we continue building our product and marketing efforts.

Welcome to the team, James!

The U.S. Securities and Exchange Commission’s responsibilities include, but are not limited to, promoting capital formation while maintaining appropriate protections for investors. As private markets are exempt from rigorous disclosures required for funds registered with the SEC, individuals have historically been unable to access alternative investments unless they met wealth thresholds to qualify as accredited investors.

The definition of an accredited investor has recently been updated, and Poolit seeks to democratize access to alternative investment strategies even further by providing exposure through low-cost registered funds.

Registered Funds vs. Accredited Investors

In the aftermath of the 1929 stock market crash, the Securities Act of 1933 was enacted to require complete and accurate disclosure of information necessary to make an investment decision. However, private offerings were exempt from the registration requirement’s information disclosures.

As a result, unregistered securities — such as private equity funds, venture funds, or hedge funds — were only accessible to accredited investors having sufficient knowledge and expertise. These offerings were limited to ensure that participating investors were able to decide to invest for themselves or sustain losses, rendering the protections of a registered offering unnecessary.

Individuals qualified as accredited investors under the Securities Act’s definition use wealth as a proxy for financial sophistication based on certain levels of net worth or income. The wealth thresholds were measured by either a net worth of over one million dollars excluding a primary residence’s equity or two years of income exceeding two hundred thousand dollars.

However, even among accredited investors, the disparity of access to these unregistered securities, investing in areas of the economy that disproportionately create new jobs, foster innovation, and provide growth opportunities, has increased due to the excessive costs and minimums the industry has gravitated towards to reduce the administrative burden of servicing investors.

In 2019, registered offerings accounted for $1.2 trillion (30.8%) of new capital, compared to approximately $2.7 trillion (69.2%) that the SEC estimated was raised through unregistered offerings. Of this, the estimated amount of capital reported as being raised in offerings accessible to accredited investors was approximately $1.56 trillion. [https://www.sec.gov/rules/final/2020/33-10824.pdf]

Expanding Investment Opportunities

In 2020, the SEC finalized a rule to expand investment opportunities while maintaining investor protections by amending the definition of an accredited investor. For the first time, individuals are permitted to participate in private capital markets based on alternative measures of financial sophistication, not only based on their income or net worth.

Specifically, the amendments add a new category for individuals to qualify as accredited investors based on certain professional or educational certifications, designations or credentials. The SEC initially designated securities industry representatives holding the Series 7, Series 65, and Series 82 licenses, which relate to competency regarding securities generally, state law and private offerings, respectively.

In addition to facilitating capital formation by expanding the pool of investors and increasing the liquidity of unregistered offerings, newly eligible accredited investors benefit from being able to participate in the high-growth stages of issuers who tend to stay private for longer than in the past. However, retail investors are left with less access to the broad spectrum of investment markets as a whole, missing out on the opportunity for excess or uncorrelated returns.

Attempts to expand retail investor access to private markets while mitigating risks include having experienced institutional alternative investment firms manage regulated funds, such as mutual funds, exchange-traded funds (ETFs), or real estate investment trusts (REITs). Currently, the SEC requires registered closed-end funds that invest more than 15% of their assets in private funds to be limited to accredited investors.

Poolit Provides Access to Alternative Strategies to Accredited Investors

We are convinced that everyone should have the opportunity to generate meaningful wealth, so we left Wall Street to rebuild it for you. Poolit is seeking to capitalize on changing regulations to offer individuals the opportunity to invest in the same potential risk-adjusted returns offered by alternative strategies previously accessible only by institutions and high net worth investors.

Partnering with professional alternative investment managers through a registered fund, Poolit’s offering will provide broad exposure to private market strategies in a single low-cost investment. To further democratize alternatives, the fund will also have no minimum investment. Poolit is expanding alternative investment access to all accredited investors and has the long-term goal of working with regulators to make alternatives available to all investors regardless of net worth.

To begin building your wealth and realizing your potential, get early access and be the first to know about new alternative investments on Poolit by providing your email at https://www.thepoolit.com.

Hedge fund strategies are structured to generate superior risk-adjusted returns. By implementing strategies that are intrinsically event-driven, or that offset some of the risks of investing in certain securities by shorting others, managers seek to deliver relatively steady absolute performance with little correlation to the market.

Industry-leading hedge funds historically generated outsized returns, and alternative investment managers now increasingly employ hedge fund strategies to reduce risk in client portfolios. Adding a hedge fund strategy to either a traditional portfolio or a portfolio of alternative investments may mitigate overall portfolio volatility. It may also provide stable risk-adjusted returns that enhance an investor’s potential to achieve their goals.

Hedge Fund Strategies

Hedge funds formerly attracted inflows by generating superior returns both on an absolute basis and relative to the market, by using debt and derivatives to leverage gains on client investments. But using leverage to take concentrated positions that performed poorly could cause losses in excess of a fund’s investment capital.

As a result of growing competition using similar strategies, the expected aggregate returns from hedge funds as an asset class have been re-rated substantially lower. In addition, liquidity inflows into public markets from central banks (since the Global Financial Crisis in 2009) led to increased correlations between investment returns within and across asset classes. The dispersion of performance across hedge fund managers remains wide, so achieving high relative returns increasingly relies on adept manager selection.

Hedge funds continue to employ an array of investment strategies across public equity, public credit, and multi-asset portfolios. By structuring funds that generate returns primarily through alpha (security selection) as opposed to beta (exposure to the market), managers seek to deliver relatively steady equity-like performance with lower risk (volatility) than the market.

Long/Short equity strategies seek to reduce market risk by “buying long” and “selling short” stocks with similar risk exposures, generating gains based on the fundamentals of each underlying business. This strategy is often biased to market gains, as not all of the long exposure is hedged by short positions. Equity strategies can also be market neutral by seeking entirely to offset long and short exposures.

Activist hedge funds seek to make investments in underperforming companies, intending to unlock value by being a catalyst for change. Gains may result from higher valuations, based on higher earnings potential driven by revised strategies under new management, or realized by a sale to a strategic or financial buyer.

Event-driven hedge funds implement strategies that pay off based on the expected outcome of a significant corporate event, the catalysts of which are often relatively independent from the broader market. For example, merger arbitrage strategies invest in companies that are the targets of recently announced transactions that haven’t been completed as they await regulatory and shareholder approval. Distressed debt strategies capitalize on bankruptcies and corporate restructurings, investing in struggling companies to help refinance and turn around their business models. These just scratch the surface of the types of events around which hedge funds can invest.

Credit hedge funds are often based on relative value strategies between the debt of different companies. Credit strategies can also include capital structure arbitrage between the senior and junior debt securities of the same issuer, or arbitrage between a single debt security or highly similar debt securities that are trading at different prices across multiple markets. Credit strategies tend to perform when credit spreads narrow.

Macro funds focus on economic trends that may affect stock markets, interest rates, commodity prices and currency exchange rates. These funds can be more volatile due to large directional bets that may not be adequately hedged, and due to the enormous complexity and uncertainty involved in determining the fundamentals of broad markets and economies. Quantitative funds (a modern evolution of macro funds) programmatically analyze historical market returns to create statistical models that trade around factors driving near-term performance, but that can change over longer time periods, potentially breaking the models.

The Benefits of Hedge Fund Strategies

Implemented together with other asset classes, hedge fund strategies can enhance portfolios by providing risk mitigation through uncorrelated returns. The benefits are often measured over time by how efficiently they generate returns relative to their reduced risk (their absolute returns). By providing resilience in market downturns, hedge funds can be extremely accretive to long-term portfolio outcomes when their healthy balances throughout a downturn are redeployed into other asset classes in the portfolio that have become significantly dislocated from fair value. Thanks to the liquidity of their underlying investments in mostly publicly traded assets, this reallocation process is quite feasible compared to realizing and shifting value from more illiquid alternative asset classes.

Diversification is a strategy that constructs portfolios of investments to balance performance based on their different risk profiles and return potential. The goal is to achieve strong returns while mitigating downside risk due to poor performance from concentrated positions in certain securities or asset classes.

By diversifying portfolios, the positive performance of some investments may offset the poor performance of others based on their underlying fundamentals and investor sentiment. Diversification also takes into account both how investments respond differently relative to each other and (in some cases) in opposite directions due to market volatility.

The degree to which investments change in value — relative to or inversely from each other — is known as “correlation.” The less correlated a portfolio’s investments, the greater the diversification benefits.

Diversification can be achieved by investing within asset classes and across different asset classes. Hedge funds are an excellent tool for achieving diversification in that they are intentionally constructed to be uncorrelated to other market-driven asset classes and in that they invest in different types of securities across equities, credit, and multi-asset portfolios.

Poolit Provides Access to Hedge Fund Strategies to Anchor Portfolio Returns

Historically, hedge fund strategies were only accessible to institutional investors such as university endowments and pension plans, or to ultra-high-net-worth individuals considered to be “qualified purchasers” with a net worth of over five million dollars (excluding their home equity). Individuals also lacked access to fund manager distribution channels or their large wealth management partners to make such investments.

We are convinced that everyone should have the opportunity to generate meaningful wealth through a diversified portfolio with exposure to premier alternative investment funds. So, we left Wall Street to rebuild it for you. Poolit is capitalizing on changing regulations to offer accredited individuals the opportunity to invest in the same potential risk-adjusted returns offered by the hedge fund strategies previously accessible only to institutions and high-net-worth investors.

Partnering with professional investment managers through a registered fund, Poolit’s hedge fund offering will provide broad exposure to hedge fund strategies in a single investment. To further democratize alternatives, the fund will also allow for no minimum investment.

To build your wealth and realize your potential, get early access to Poolit. Be the first to know about new alternative investments by joining our waitlist at: https://www.thepoolit.com.

The highest inflation in a generation is having a shocking effect on both individuals’ daily spending and long-term savings. While its causes may vary, inflation is often driven by too much demand chasing too few goods.

As inflation destroys the purchasing power of savings over time, investors likely need higher returns relative to what public market investment models currently offer. Adding alternative strategies to a traditional portfolio may enhance an individual’s potential to achieve their investment goals.

Inflation Drivers

Prices for certain goods and services may fluctuate as an economy adapts to temporary production shortages and excess inventory resulting from changing consumer purchasing patterns, such as millennials prioritizing experiences over possessions. Unlike these temporary fluctuations, inflation is a sustained increase in the aggregate price level of an overall economy’s goods and services.

There are two primary drivers of inflation. Individuals with more money and credit can cause rising demand to exceed production and pull prices higher, which may lead to increased investment and economic growth.

Alternatively, when money supply increases flow through commodity prices or labor markets, rising production costs may decrease supply, pushing prices higher and causing growth to slow as consumers narrow their spending to necessities.

Underlying both types of inflation may be excessive growth in the money supply.

Measuring Inflation

The Consumer Price Index (CPI) measures the weighted average of prices for a basket of goods and services such as food, energy, clothing, housing, transportation and medical care. Food and energy are often excluded from measuring core inflation as their prices may be more volatile due to commodity cost fluctuations and seasonality.

Aggregate inflation affects the cost of living differently for individuals based on their own spending priorities. Increases in housing or transportation prices will impact those in the market to buy homes or cars, while rising medical care costs may disproportionately burden the elderly.

The Producer Price Index (PPI) measures the change in prices received by producers for goods and services. The PPI is from the perspective of the seller, in contrast to the CPI, which is from the purchaser’s perspective.

In addition to the impact on one’s cost of living when saving for retirement, individuals should be aware of additional inflation measures that may impact their financial goals, such as paying for their children to attend college.

The Higher Education Price Index (HEPI) measures the average prices of a fixed basket of goods and services purchased by colleges and universities for operational costs such as faculty salaries to determine the increases in funding sources such as the tuition, room, and board necessary to maintain their budgets. Since its inception in 1978, the HEPI has far outpaced the CPI. [https://www.commonfund.org/blog/hepi-defines-college-inflation]

Inflation Today

In May 2022, inflation increased the most on an annual basis in nearly 40 years. The CPI increased 8.6%, the largest 12-month increase since December 1981. The energy component rose 34.6%, the most since September 2005, while the food component increased 10.1%, the first increase of 10% or more since March 1981. [https://www.bls.gov/news.release/archives/cpi_06102022.htm]

Today’s inflation appears to consist of both demand-pull and cost-push drivers arising from a complex and challenging economic environment. The global COVID pandemic that began in 2020 led governments to provide direct fiscal stimulus payments to corporations and individuals to sustain demand by maintaining workforces, supporting idled workers and extending unemployment benefits. In addition, central banks provided monetary stimulus through additional credit capacity by directly purchasing government and corporate bonds.

However, supply chain shocks from global outbreaks, regional economic lockdowns, and local facility closures led to an initial sharp decrease in production and ongoing disruptions. The recent Russian invasion of Ukraine has exacerbated global supply chain dislocations and inflation, due in part to sanctions on Russian energy sources and interruptions of Ukrainian food exports.

After an initial plunge in production and prices, the inflationary aftershocks varied. Working from home initially lead to rising home prices and vacation rental rates as white-collar workers avoided exposure by leaving densely populated cities. These remote workers also drove used car price inflation, while new car production assembly lines slowed due to semiconductor supply chain woes.

As economies began to reopen, renewed demand began to outstrip the rebound in production. Direct stimulus payments put upward pressure on labor costs as some individuals refrained from returning to the workforce, whether to supervise remote schooling or wait until vaccines reduced the risk of severe illness and death.

Vaccines have helped economies return to a new normal as cities awaken from the return of workers to the office a few days a week on average. But urban rents are rising due to a flood of residents and limited construction in the interim.

Over a longer time horizon, persistent inflation devalues savings at a rapid rate, as a dollar today will buy less each year. Inflation even erodes the real returns on savings that are invested.

Therefore, one’s investments need to work harder to preserve and enhance purchasing power. Adding alternative investment strategies to a traditional portfolio may improve an investor’s potential for risk-adjusted returns that outpace inflation.

Investment Models & Inflation

Portfolio strategies diversify investments to balance performance based on their different risk profiles and return potentials. The goal is to achieve strong returns while mitigating downside risks from market-related volatility or poor performance due to concentrated positions.

By diversifying portfolios, the positive performance of some investments may offset the poor performance of others based on their underlying fundamentals and investor sentiment. Diversification also takes into account how investments respond differently relative to each other, and in some cases the opposite direction due to market volatility.

The degree to which investments change in value relative to or inversely from each other is known as correlation. The less correlated a portfolio’s investments are, the greater the diversification benefits.

A popular portfolio model seeking capital appreciation, current income, and diversification to hedge against volatility from uncertainty and inflation allocates 60% of assets into stocks and 40% into bonds. This mix of securities has the potential to deliver higher returns from stocks than inflation and steady returns from interest received from bonds, as well as low correlations between the two asset classes historically.

Rebalancing holdings periodically based on investment performance back to the portfolio model’s 60/40 allocations may enhance the potential for positive returns and lessen volatility. For example, if stocks have declined and represent less than 60% of the portfolio, rebalancing results in buying more stocks at lower prices.

To address limitations of the relatively static 60/40 portfolio, a retirement target date investment model adjusts the mix of stocks and bonds during an investor’s career and after they retire. Target date funds address the need for growth to reduce the risk of outliving one’s savings in retirement by having a much greater allocation to stocks than the 60/40 model early in an individual’s career.

Over time, target date funds dynamically shift their holdings more toward conservative bonds to preserve wealth and provide income. Target date funds are also periodically rebalanced to maintain the model’s mix of stocks and bonds relative to an investor’s retirement date.

However, both static and dynamic asset allocation models have potential risks in the current environment that may impede meeting an investor’s financial goals. The monetary stimulus by central banks since the Global Financial Crisis in 2009 caused interest rates to fall to record lows.

As a result, the returns from the investment models’ hefty allocations to bonds have underperformed historical results since the crisis began over 10 years ago. Rebalancing has only compounded the problem following recent periods of stock market gains as more low-yielding bonds were bought.

In addition, the massive liquidity inflows into public markets led to increased correlations in investment returns between stocks and bonds, lowering the benefits of diversification.

Now, central banks are withdrawing stimulus to reign in inflation by raising interest rates and selling bonds. The impact on investment portfolio bond allocations is likely a decline in prices inversely related to rising rates, while the low embedded yields of prior bond purchases are unlikely to provide a sufficient hedge against rising inflation.

At the same time, rising rates are likely to impact corporate profit margins, earnings, and cash flows. As a result, the even more hefty stock allocations of the investment models are likely to be more volatile as valuations should contract, exposing investors near or in retirement to the risk of incurring permanent capital losses.

How do Alternatives Enhance Returns to Outpace inflation?

Alternative investments may provide uncorrelated returns that increase diversification relative to a traditional portfolio, as well as the potential for enhanced capital appreciation or income to outpace inflation. However, investors trade off the liquidity of being able to sell securities at any time through the public markets to have the opportunity to realize the performance premium that alternative investments offer through longer term strategies.

Different alternative investment strategies can separately address inflation. Private equity and venture capital may provide greater capital appreciation than publicly traded stocks. Privately-owned companies also aren’t at the mercy of market volatility, which may be uncorrelated to returns based on a company’s fundamental improvements.

At the same time, private credit may offer greater income than public debt securities. Terms can include floating rates that increase with rising market interest rates to hedge against inflation, while returns are uncorrelated to fixed-rate securities.

In addition, private real estate can offer both income and capital appreciation while historically being uncorrelated to stocks. Furthermore, hedge fund strategies can mitigate risks by seeking to deliver relatively steady equity-like performance with uncorrelated returns achieved by reducing systematic market risk exposures.

Poolit Provides Access to Alternative Strategies to Fight Inflation

Historically, alternative strategies have been only accessible to institutional investors such as university endowments and pension plans, or high net worth individuals considered to be qualified purchasers by having a net worth of over five million dollars excluding home equity. Individuals also lacked access to fund manager distribution channels or their large wealth management partners in order to make investments.

We are convinced that everyone should have the opportunity to generate meaningful wealth, so we left Wall Street to rebuild it for you. Poolit is seeking to offer accredited individuals the opportunity to invest in the same potential risk-adjusted returns to outpace inflation offered by alternative strategies previously accessible only by institutions and high net worth investors.

Partnering with professional alternative investment managers through a registered fund, Poolit’s offering will provide broad exposure to private market strategies in a single investment. To further democratize alternatives, the fund will also have no minimum investment.

To begin building your wealth and realizing your potential, get early access and be the first to know about new alternative investments on Poolit by providing your email at https://www.thepoolit.com.

Venture capital is a strategy that makes investments in early-stage businesses to finance innovative ideas and validate their commercial potential. The manager’s ability to differentiate the company’s potential from an array of competing entrepreneurs seeking capital to address similar market solutions is a prime driver to create value.

Venture capital funds typically exit their investments after providing the capital needed to get their initial products to market. By investing in companies when their long-term success is uncertain, venture capital firms have the potential for outsized returns from winning investments that far exceed public market expectations.

Structuring Venture Capital Funds

Bringing innovation to market often has significant capital needs, providing investors an opportunity to bridge the funding gap between traditional sources, such as banks and public equity markets, and to earn potentially high returns given the risk taken. Venture capital managers typically raise pools of funds from institutional investors and high net worth individuals. Funds are often structured as private partnerships, with the management firm as the general partner who identifies investments, and limited partners who invest capital.

Once a fund has been raised, a manager’s investment knowledge and operational expertise can then assess a company’s industry positioning, management capability, and business plan. While most venture capital investments are made in private start-ups, some are made in businesses commercializing academic and government investments in research.

Managers are able to diversify their portfolios by investing in several businesses, which improves the likelihood of outsized financial returns from a successful investment that could offset losses elsewhere in the fund. To navigate the risks of bringing a company’s innovative products to market, venture capital managers may structure investments as preferred stock that provides some downside protection without limiting potential upside gains.

While investors usually have limited rights regarding a fund’s investments, funds deploying scarce capital in small amounts across a diverse set of business models may mitigate risk.

The Venture Capital Ecosystem Drives Value

The track record of a venture capital firm’s partners are often more important given capital deployments across a range of business models and the need for just a few to succeed. The access that venture capital managers have to investment candidates through their professional networks helps filter quality opportunities.

Venture capital investments are typically funded through a series of capital raising rounds as companies reach milestones in their corporate development and product roadmap. This provides the potential to generate attractive returns for new investors over the cycle of a company’s future stages of development.

‘Early-stage’ venture capital firms may focus on providing seed financing to companies in early funding rounds. These investments have significant business model risk and need to build out a corporate infrastructure that includes product development, sales, and marketing. But by making small investments upfront, successful execution by company management teams can lead to asymmetrically positive returns for investors.

‘Late-stage’ venture capital firms focus on companies that have achieved certain milestones like strong domestic market penetration and need additional capital to further their development with new products or channels. Series C and later funding rounds typically include larger investments made at higher valuations, offering a lower return potential for less risk taken.

Venture capital accelerates companies that are just getting to market and creates a first mover advantage ahead of the competition. However, portfolio companies often release products that are just good enough. Disruptive innovations usually don’t acquire mainstream acceptance until the product’s quality catches up to customers’ standards.

After nurturing an innovation to market, venture capital firms often exit their investments when there’s visibility into a company’s potential growth but before its long-term value can be fully assessed. Taking a company public through an IPO provides additional capital for transitioning to a mature business with a robust set of product offerings.

Recently, though, fast-growing companies are staying private longer. Venture capital firms may sell their portfolio companies to private equity firms that can also provide additional operational support to accelerate revenue growth, margin expansion and positive cash flows. Corporations could also be strategic buyers of portfolio companies to acquire new capabilities and enhance their own growth potential.

Poolit Provides Unique Venture Capital Access to Individual investors

Historically, venture capital was only accessible by institutional investors such as university endowments and pension plans, or high net worth individuals considered to be qualified purchasers having net worth of over five million dollars excluding home equity. Most individuals also lacked access to highly selective fund manager distribution channels in order to make investments.

Poolit is seeking to offer accredited individuals the opportunity to invest in the same strong risk-adjusted returns generated by venture capital, previously accessible only to institutions and high net worth investors.

Partnering with professional venture capital managers who employ multiple strategies across early- and late-stage markets, Poolit’s offering will provide broad exposure to venture capital in a single investment. To further democratize alternatives, the fund will also have no minimum investment.

To begin building your wealth and realizing your potential, get early access and be the first to know about new venture capital investments on Poolit by providing your email at https://www.thepoolit.com.

Private equity (“PE”) is a strategy that invests in businesses that are underperforming or need additional capital. PE is focused on improving operations and then selling the companies to realize the value created. However, risks arise from the use of debt upfront to acquire companies, while the timeframe for investors to realize any gains can be over a period of several years. Risks are mitigated by diversifying investments across several transactions.

Firms that manage private equity funds drive value from the control they exercise over a target company. Investors benefit from selecting managers with expertise in the companies they target, which may be across several industries at the largest firms or more focused at specialized firms. Combining a manager’s investment knowledge and operational expertise with investors’ patience has the potential to drive higher returns than the public markets.

Structuring Private Equity Funds

The number of publicly traded stocks has fallen by roughly half in recent decades through mergers and bankruptcies, making private equity an attractive option for investors seeking to access the full spectrum of potential opportunities to reach their goals. Private equity managers typically raise pools of funds from institutional investors and high net worth individuals. Funds are often structured as private partnerships, with the management firm as the general partner that sources investments, plus limited partners that invest their own capital but have a limited ability to restrict investments the private equity firm makes.

Once a fund has been raised, the manager will seek targets that may be underperforming due to poor management or that may be able to unlock new growth opportunities when paired with the fund manager’s operational expertise. Targeted businesses can be units of large corporations or stand-alone companies. They can also be public corporations or private companies. In the case of private companies, additional capital may help them transition from a subscale mom-and-pop business to mature companies with more robust product offerings and broader sales distribution networks.

A private equity fund may have an investment lifecycle of up to 10 years or more — they may raise funds and put capital to work in target companies during the first half of this period and then in the second half apply their expertise to create value and distribute the sales proceeds as the fund is wound down. Individual investments in the fund may have a holding period of three to five years or more, depending on the rate of improvement in each business and the market conditions for an IPO or a sale to another private buyer or corporation.

Private equity may provide greater capital appreciation than publicly traded stocks. With fewer regulatory requirements than public entities, private businesses are not at the mercy of quarterly earnings results which drive short-sighted decision making at public companies. And by having the ability to directly own and control their portfolio companies for long periods of time, private equity managers can reap the rewards of their value creation efforts and wait out adverse market conditions when preparing to exit their investments.

Managers can diversify their fund portfolios by acquiring several businesses, reducing risk from their use of debt in each acquisition. Using debt improves the financial returns of successful investments via these transactions (known as leveraged buyouts). To navigate the risks from leverage, manager due diligence (prior to investing in a company) may include identifying companies with stable cash flows, manageable capital requirements, and reasonable growth opportunities. Private equity managers also structure transactions to ensure direct operational control and thereby execute their strategies for improvement.

Investors in private equity funds usually have limited rights, but often funds have limitations on the size or industry concentrations of their investments.

Evolving Value Drivers Transform Private Equity Returns

Private equity previously acquired a negative connotation due to past practices that were perceived as greedy. Early phases of private equity investing included buying companies with debt then selling off units, or buying business units whose worth was undervalued within a corporation (with the goal of selling at a higher multiple). Paying down debt and seeking a higher multiple to realize returns often led to cost cutting that negatively impacted employees and their communities through layoffs and facility closures.

As private equity has matured over time, value drivers have changed materially. In stark contrast to the austere tactics of the past, managers today seek to improve operating performance by increasing revenue and expanding profit margins through proactive intervention, partnership, and value creation. In addition to applying its expertise, the fund manager can accelerate an existing management team’s strategy with additional capital or replace poor management with talent from their professional networks.

Management teams are aligned with the fund manager through financial incentives. The discipline of private equity keeps portfolio companies focused on realizing operational improvements and generating stronger cash flows, rather than pursuing inefficient, non-core strategies.

Revenue improvements and margin expansion are increasingly being achieved through technology to scale businesses by expanding geographic markets, reaching new customers, and gaining cost efficiencies. With the growth of big data, applying data analytics is a new source of value creation.

The Private Equity Investing Landscape

Private equity managers range from large integrated firms that can acquire corporations worth billions of dollars, to specialized firms that can invest in niche markets, to even smaller firms that can be opportunistic and acquire just a few businesses.

The largest managers have funds that are diversified globally and across industries. This gives them the ability to have insight that smaller firms lack. In addition, they create their own ecosystem that can share best practices, where portfolio companies can become customers of one another and the fund manager can be a vendor of shared services that help contain costs.

Firms that specialize in niches like frontier technology or biotech often have portfolio companies with investment needs related to getting their initial products to market. By accelerating product development to create a first mover advantage, these firms have the potential to generate outsized returns.

Smaller firms have the opportunity to identify attractive opportunities that are not big enough for the larger firms to put capital to work. They also have the ability to partner with each other to make larger acquisitions than they could alone while still diversifying their risk.

An increasingly popular strategy is growth investing, which targets industry disruptors that have already achieved positive cash flows. By employing similar strategies for increased revenue and margin expansion (as mentioned above), fund managers accelerate portfolio companies’ product and service development to achieve industry-leading positions in their markets.

Poolit Provides Individual Investors Unparalleled Access to Private Equity

Historically, private equity was only accessible by institutional investors such as university endowments and pension plans, or high net worth individuals considered to be qualified purchasers: having a net worth of over five million dollars excluding home equity. Even for investors meeting that high bar, access to the best firms is difficult to obtain without going through expensive channels like private banks.

Poolit offers accredited individuals the opportunity to invest in these previously inaccessible private equity funds via a mobile wealth management platform with industry-low fees. Our platform plans to provide broad exposure to high quality private equity opportunities and will have no minimum investment.

To get early access and be the first to know about new private equity investments on Poolit, join our waitlist at: https://www.thepoolit.com.

Poolit.

Build your wealth. Realize your potential.

Dakotah: Product is one of the most important roles in a tech organization. Good product leaders have to manage complex relationships between stakeholders — engineers, designers, legal, marketing, company executives, and our users. Doing so requires more than just an ability to strategize and communicate requirements, it also requires extremely high EQ.

When we undertook the search to find a Director of Product, we made sure to cast a wide net. We interviewed candidates from competitors, incumbents, and even from non-finance related consumer internet companies. While we had a slate of strong candidates, Gabe easily stood out from the crowd. He was not only a strategic thinker who I knew could help co-create the future along with me, but he was also the culture carrier we needed for this role. Gabe’s spirit and enthusiasm has become a visceral aspect of the culture here at Poolit. That in conjunction with his adept ability to push our product forward has multiplied our capacity and capabilities as an organization.

Another fun fact about Gabe is that I’ve known him since I was a freshman in college. I’ll never forget staying up late studying for Goldman investment banking interviews together or the late nights we spent as junior bankers building models and putting together presentations. When Gabe left Goldman he went on to SmartAsset to pursue his passion for democratizing access to complex financial tools to ensure positive outcomes for people. We continue to share the same grit we had all those years ago as we push toward our new goal: ensuring everyone has access to blue-chip alternative investment opportunities in a seamless mobile-first format.

Gabe’s Interview

What did you do before joining Poolit?

Gabe: Before joining Poolit, I was on the Product team at SmartAsset for over 4.5+ years, helping build tools, calculators, and content to help people navigate life’s big personal finance decisions. Before SmartAsset, I did investment banking at Goldman Sachs for a little over a year after college. I studied Finance and Entrepreneurship at The University of Texas at Austin (Hook ’Em) before moving to New York City to start full time.

How did you hear about Poolit?

Gabe: Poolit’s CEO & Founder Dakotah Rice and I first met during the summer of our freshman year in college at Goldman Sachs Undergraduate Camp. After two summer internships together and becoming roommates in NYC after college, I became close friends with him and realized that the sky was the limit for him. I saw on LinkedIn in early 2022 that he started Poolit and I reached out to congratulate him. I was eager to learn more about how he started it and hear about how it was going so far, so we were able to connect in May.

Why did you decide to join Poolit?

Gabe: When I first heard Poolit’s vision of expanding access of premier financial products and investment opportunities to every individual globally, I was instantly excited to get involved and help in any way possible to make this vision become true. Also, I always wanted to join a small startup in order to get that experience of building something from the ground up, so that was a big selling point. After chatting with Dakotah and learning more about Matt Binder (Poolit CTO), I had no doubt that this startup was going places due to their amazing and strong leadership. Matt was incredibly bullish on the idea and was incredibly sharp when I first met him via video chat, so it just made me that much more excited to potentially join. Overall, I have so much confidence and trust in Dakotah to lead this team to success since he is extremely passionate, has a relentless work ethic, and is truly a visionary.

First impressions of the team?

Gabe: So far, I have been nothing but impressed by the team here at Poolit. I joined last week alongside Evan M (Chief Growth and Impact Officer) and James Leo (Chief of Staff and Head of Operations), who have been awesome teammates to say the least. The design team is so talented and amazing to work with and the Tech team is awesome. It is super exciting to really see how motivated and passionate the team is about making our vision of widespread access to premier alternative investment opportunities a reality. I can’t wait for us to grow even more and see what we accomplish together!

Exposure to alternative investments, specifically, private equity, private credit, private real estate, and hedge funds, may complement traditional portfolios by providing uncorrelated returns that increase diversification, as well as the potential for enhanced capital appreciation or income. However, investors trade off the liquidity of being able to sell securities at any time through the public markets in order to have the opportunity to realize the performance premium that alternative investments offer through longer term strategies.

Different alternative investment strategies separately address different investment goals. Private equity may provide greater capital appreciation that complements publicly traded stocks, while private credit can offer enhanced income that complements public debt securities. In addition, private real estate can offer both income and capital appreciation, while fund of fund strategies that invest in hedge funds can mitigate risks.

Private Equity

The number of publicly traded stocks has fallen by roughly half in recent decades through mergers and bankruptcies, making private equity an attractive option to seek companies creating new markets. But private equity previously acquired a negative connotation due to past practices that were perceived as greedy. Paying down debt and seeking a higher multiple to realize returns, often led to cost cutting that negatively impacted employees and their communities through layoffs and facility closures. However, value drivers have changed over time. Managers today seek to improve operating performance by increasing revenue and expanding profit margins through proactive intervention to provide support. Furthermore, private equity is not at the mercy of traders and quarterly earnings guidance that may result in volatility from negative surprises, which are uncorrelated to returns based on a company’s fundamental improvements.

Private Credit

Recent decades have also seen a significant decline in the number of banks due to consolidation, regulation and bankruptcies, creating a need for new lenders to corporations. Private credit has helped bridge this funding need while offering investors better terms than corporate bonds provide. Terms include floating rates that increase with rising market interest rates and provide a hedge against inflation, while bonds with fixed rates decline in price to offer higher yields to attract purchasers in public markets. Floating rates enhance uncorrelated returns relative to fixed rates. In addition, private credit may have protection from bankruptcy by having as collateral the assets of a company that unsecured bonds do not.

Private Real Estate

Private real estate offers current income from rents as a primary objective and capital appreciation as a secondary objective from the sale of properties. Real estate historically was negatively correlated to stocks. However, publicly traded real estate investment trusts (REITs) have increasingly greater positive correlations to stocks due to market-related beta returns following central bank liquidity injections. Private real estate offers uncorrelated returns to public REITs by being valued on net assets based on methodologies such as discounted cash flows or recent property sales.

Each of the above strategies provides uncorrelated returns based on current fundamentals and over-time improvements in the underlying companies or real estate assets. This, compared to their traditional public counterparts based on market prices that are subject to swings in investor sentiment.

Hedge Funds

Industry leading hedge funds formerly attracted inflows by generating outsized returns year after year. But other hedge funds attracted notoriety by failing, due to using debt to take concentrated positions in securities that performed dismally. As a result of growing competition using similar strategies, the expected aggregate returns from hedge funds as an asset class have been substantially lower since their heyday. Alternative investment managers now employ hedge funds to reduce risk in client portfolios. By structuring fund of fund strategies that invest in hedge funds across multiple asset classes, managers seek to deliver relatively steady equity-like performance with uncorrelated returns from lower risk targets than expected market volatility.

Implemented together, alternative investments can provide risk mitigation from uncorrelated returns, along with the potential for enhanced capital appreciation and income. The benefits of alternative investments can be measured over time by how efficiently they generate returns relative to their risk, or their risk-adjusted returns. By adding a mix of alternative investments that have a higher risk-adjusted return than a traditional portfolio, the blended results can enhance an investors potential to achieve their specific financial goals.

Stay tuned for our next blog that outlines why these financial opportunities have been historically accessible to institutions and high net worth individuals alone and how Poolit is aiming to expand that access to all accredited investors. Join the waitlist at www.thepoolit.com to gain early access to alternative investments when we launch our app this fall.

Individual investors with public market portfolios are increasingly frustrated. A complex investing landscape characterized by extremes in liquidity and rates, global uncertainty, and inflation is directly challenging the traditional mix of stocks and bonds focused on capital appreciation and current income, plus thwarting traditional methods for diversifying portfolios in ways that hedge against such volatility and uncertainty. With this, unregulated emerging asset classes may only be exacerbating the problem.

A tidal wave of monetary stimulus from central banks — from the Global Financial Crisis in 2009 through the recent COVID pandemic — led to higher equity valuations (particularly the case for fast growing technology companies whose stocks often thrived as interest rates fell to record lows). However, massive liquidity infusions into public markets led to increased correlations between investment returns across equity strategies and traditional asset classes such as stocks and bonds. This directly lowered the benefit of diversification. Stretched equity valuations also limited additional return potential and led to sizable volatility when the COVID pandemic began, while bond yields were unattractive.

Investors of various degrees of sophistication seeking outperformance — whether in terms of capital appreciation or income — have gravitated toward riskier traditional investments, such as IPOs of companies that don’t generate positive cash flows, new asset classes such as cryptocurrencies and NFTs, or SPACs for upstarts with unproven business models. While the wealthy are often early to allocate limited exposure to new asset classes (and better able to absorb any losses), new investors chasing outperformance with concentrated positions of their limited savings can suffer substantial financial setbacks. Now, with central banks withdrawing support for markets by raising interest rates, companies’ profit margins, earnings and valuations are all likely to contract; and current bond holdings are unlikely to provide a hedge against rising inflation.

However, investing in private market alternatives may complement traditional portfolios by offering the potential for both enhanced returns and lower volatility. Such alternative investments, though, have been primarily accessible to institutions such as pension plans and university endowments with meaningful exposure, as well as to high-net-worth investors who have been gradually adding exposure. But individual investors largely have been left behind due to the high levels of income or net worth required to invest in alternatives. Additionally, high minimum investment thresholds and limited return of capital opportunities have hindered individuals’ allocations to alternative investment strategies.

What is diversification and how does it improve investment returns?

Diversification is a strategy that constructs portfolios of investments to balance performance based on their different risk profiles and return potentials. The goal is to achieve higher long-term returns while mitigating downside risks from market-related volatility, or due to poor performance from concentrated individual holdings.

By diversifying portfolios, the positive performance of some assets may offset the poor performance of other holdings based on their underlying fundamentals and investor sentiment. Diversification also takes into account how investments respond differently, relative to each other in different market environments.

Diversification can be achieved by investing across different asset classes, as well as across different holdings within asset classes. For example, investors can invest in stocks and bonds with an underlying mix of growth and dividend-paying stocks, as well as corporate and government bonds. A portfolio of as few as 25 to 30 stocks provides a high degree of diversification. Tech-enabled industry disruptors can often exhibit outsized performance based on high multiples for expected future growth, while established companies may appreciate more slowly while paying consistent dividends. But in times of market volatility or economic recessions, companies that don’t generate cash may experience precipitous declines while dividend-paying stocks become more attractive due to the income received.

The steady income from adding bonds to a portfolio can enhance diversification. When compared to government bonds, which offer less risk, corporate bonds pay higher interest while having varying degrees of increased risk. In times of volatility or recession, however, corporate bond prices may decline due to the risk of bankruptcy while government bond prices rise as investors seek safe havens.

Stocks and bonds often trade inversely to each other. Strong economic growth can generate inflation, causing stocks to rise but bond prices fall due to higher interest rates. Adding real estate, commodities and international securities can broaden diversification. The degree to which asset classes and the holdings within an asset class change in value (relative to or inversely from each other) is known as correlation. The less correlated a portfolio’s holdings are, the greater the diversification benefits. However, certain factors can cause correlation benefits to break down. The wave of financial support provided by central banks these past years has tended to lift all boats, lessening the range of returns from different assets and asset classes. The return of an investment relative to market volatility is known as beta. Positive liquidity-driven markets led to higher returns from beta and thus higher correlations.

In addition, economic conditions may cause expected correlations to change. Weakening economic growth as inflation rises can cause the prices of both stocks and bonds to decline, rather than to move inversely to each other, as in the scenario above. Furthermore, the volatility associated with declining markets can also cause correlations to rise, as investors may seek to sell assets indiscriminately to avoid market risk.

As liquidity-driven markets subside, investors may look to add relatively uncorrelated alternative investments such as private equity, venture capital, and hedge funds to de-risk their portfolios, while preserving the potential for future gains. In Part 2 of this series, we’ll discuss how alternative investments can help achieve better long-term outcomes for portfolios when used alongside publicly available securities.

Follow Poolit on Linkedin for more information on alternatives and consider signing up for our waitlist at www.thepoolit.com to access top alternative investments when we launch our app this Fall.

Notes:

1. S&P GSCI Agriculture; Artprice Contemporary Art Index; S&P/Case-Shiller U.S. National Home Price Index; iShares Gold Trust (IAU); Rare Whisky Apex 1000; NCREIF Farmland Index; Liv-ex 1000; PWCC 500; Abrdn Physical Platinum Shares ETF (PPLT); Invesco DB Oil Fund (DBO); Bitcoin (BTC); S&P 500 (SPX); iShares 7–10 Year Treasury Bond ETF (IEF)