More accredited investors means more support for private capital markets
Startups need fund managers.
And fund managers need LPs to invest in their funds and SPVs.
So it would follow that when a startup ecosystem has more LPs, there are more fund managers, and therefore more capital available for startups.
This is an overly simple way to describe the relationship between startups and the people that give them capital. But it’s actually how it works!
Over the past 12 years, the early-stage VC world has been growing in all 3 areas: startups, fund managers, and LPs.
Specifically, the number of LPs has gone up because the SEC has rewritten the rules for accredited investors. They’ve broadened their definition to increase the total number of people that can legally invest in private markets — i.e. startups.
Fund managers can’t complain because it’s easier for them to fundraise.
There’s less friction for them to go from their first fund (which is the most difficult) to their second fund (the main goal for an emerging fund manager).
Again, the SEC plays a large part in this.
Because the SEC has relaxed the restrictions for accredited investors, they’ve created a more diverse pool of investors, which in turn, means a more diverse private market ecosystem.
Even today, most accredited investors are people that have existing family generational-wealth.
But that’s all changing. Here’s the first example …
Nearly 1 in 10 US households now qualify as accredited.
In 2016, the estimate was around 9.9% of households could qualify as accredited. Or 1 in 10.
That was up from 8.3% in 2013 - a whopping +35.2% more in a little over 6 years.
For emerging fund managers — who desperately need LPs — this could be great news.
With more eligible accredited investors, emerging fund managers can more easily raise their first funds.
The SEC is expanding the pool of possible accredited investors
In August 2020, the SEC released a statement saying they were updating their requirements for accreditation “to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in those markets.”
In simpler words, neither net worth nor income made for better performing investors.
But that realization alone wouldn’t motivate the SEC to change their stance.
There are other factors at play:
- Startups are staying private longer
- Private companies are generating returns to investors while staying private, as opposed to when they go public
- With a broader definition of what it means to be accredited, it allows for more diverse and underrepresented investors to partake in the private markets. This means more types of entrepreneurs and startups in the marketplace
The SEC was riding a wave that the private markets naturally created.
For emerging fund managers and startups, this is great news. It cultivates a more diverse startup ecosystem, with founders and fund managers from different backgrounds.
This is one reason we’re seeing a “democratization” of private markets.
More accredited investors means more emerging fund managers
Historically, to engage in private markets you had to be of a certain “financial sophistication.” In other words, you had to meet certain income requirements or net worth benchmarks.
But logic would point out: net worth nor income correlate to sound financial decision making.
Besides, net worth is largely a result of your family’s ability to build wealth generation over generation. In the United States — where wealth disparity is high — this meant the pool of accredited investors were mostly white men.
And to say that an investing ecosystem is made up of one type of person would be incorrect. Just like a jungle doesn’t have one type of cat, or a coral reef has one type of fish. A thriving ecosystem that creates positive outcomes is diverse.
But how might this relate to private capital markets with fund managers and LPs?
It’s simple: more accredited investors means more LPs. And more LPs means more emerging fund managers.
What you have here is a growing market, which any entrepreneur is bound to pay attention to.
We’re seeing this ourselves at Allocations…
Allocations serves a growing market of LPs and fund managers
At Allocations, we’re excited at the growth and diversification we’ve seen over the past 12 years.
We believe that a broader pool of accredited investors creates a more diverse — and therefore stronger — investment environment.
After all, with more accredited LPs comes more capital available to fund managers of all backgrounds.
We have a client for example, who runs a climate tech fund making investments in USA, Canada, Singapore, South Africa & Australia.
They told us: “Thank you team Allocations for making my climate-tech dream for the average investor a reality and helping us solo GPs sleep better at night."
This growing market of fund managers demands better, faster private equity tools.
And we’re excited to build these tools for this diverse group of fund managers and LPs.
Join these innovative fund managers on Allocations today — the fastest and most advanced private markets in the world.
Disclaimer: The information provided in this document does not, and is not intended to, constitute legal, tax, investment, or accounting advice; instead, all information, content, and materials available are for general informational or educational purposes only and it represents the personal view of the author. Please consult with your own legal, accounting or tax professionals.