For Steffen Pauls, director of Moonfare, private equity has the advantage of being structurally more focused on traditional economics.
How do private equity investments react during periods of market turmoil? And why should private investors care about this asset class? The point with Dr. Steffen Pauls, director and co-founder of Moonfare, a Berlin-based private equity firm that will soon be present in Switzerland.
Moonfare aims to democratize access to private equity and other alternative investments. Why did you consider it necessary to develop such an offering for individual investors?
Democratizing, or at least facilitating, access to private equity investments is the basis of the concept that led to the creation of Moonfare in 2016. We start from the idea that individuals should be able to invest in private equity, in the same way that investing institutions or very rich people. The difference between these two categories of players is striking: among professionals in the investment sector, the share destined for the private equity area reaches approximately 25% within their asset allocation, while this proportion is limited to less than 3% among private investors. Why do institutions like Harvard or Yale endowments invest so much in private equity? Because the returns in the private market are several times higher than those obtained in markets accessible to the public. It is therefore a question of putting an end to this discrimination as much as possible for private investors.
We often hear that the Anglo-Saxon markets are much more advanced in the areas of private equity and venture capital than continental Europe. Do you factor this into your development strategy?
Regarding Moonfare, our presence is, in order, the largest in Germany, where we are based. Switzerland is our second largest market, followed by the UK. Now we are not limited to Europe. Moonfare is growing very fast and is also present in the US, Canada, Israel, as well as Hong Kong and Singapore for Asia – in total we are in 23 countries currently.
American companies are rapidly adjusting their capabilities to the new reality. European technology companies will not escape this trend.
What are your projects in Switzerland and why is the Swiss market of interest to Moonfare?
We intend to continue to develop our activities in Switzerland. We are also opening an office in Zurich during the summer. Switzerland is a particularly interesting market for the group of High Net Worth Individuals (HNWI), very sophisticated clients open to private equity solutions. Overall, the Swiss market is very fragmented, with many private banks increasingly opening their product offerings to private equity.
You have concluded collaboration agreements with several medium-sized establishments, such as Bordier & Cie, in relation to French-speaking Switzerland. What can you bring to these companies?
I believe that we can precisely bring significant added value to institutions that do not have sufficient resources to offer their own offer in the field of private markets. Big banks like Credit Suisse or UBS or some of the biggest wealth management institutions don’t need us to offer solutions to their clients.
On the other hand, our offer is attractive for establishments of a more modest size. Another advantage of our offer is that bank customers can access it in the form of a white label platform. They thus have the possibility to use our solutions while remaining in their usual environment and without having to open a new user profile separately.
What happens if, as a client, I want to withdraw the money I’ve invested after two years, instead of waiting for a period of 5, 6, or 7 years or more, as is often the case in private equity?
Another advantage we offer on our technology platform is to provide a secondary market for our clients, which allows them to enter but also resell their positions more easily. With Moonfare, you can sell your positions after at least a year – you don’t have to wait between 5 and 10 years, however, as is the case with large private equity funds.
We are thus responding to the criticism leveled at private equity that investors must remain tethered for years. However, it is also true that one of the real reasons to invest in private equity is the long-term return profile offered by this asset class.
What is the sectoral breakdown of the investments you offer?
It concerns different types of assets and strategies. In the so-called “buyout” segment, the industrial and life sciences sectors are widely represented. There are also funds dedicated to infrastructure, others specialized in technologies or medium-sized companies, for example.
Faced with rampant inflation in many countries and given the rise in interest rates, is it appropriate to invest in private equity now?
I think it is even more important to invest in this asset class given the current market environment for listed bonds, which is characterized by high volatility. On the one hand, because private equity is structurally more heavily focused on traditional economics, or “brick and mortar” companies, as it is sometimes called in English. By putting money into private equity, you are investing in the real productive economy.
On the other hand, in times of high inflation, you lose money every month if you keep everything in cash. However, private equity investments yield, on average, a return of around 6 to 7% per year over time. Private equity fund managers are also working on various measures to improve the capital structure of the companies in which they invest, which also allows them to obtain an attractive return.
If we compare past cycles, we see that private equity is usually able to outperform equities during periods of recession. And the fact that prices have already dropped in relation to the highest levels reached last year also makes it possible to acquire companies at more advantageous prices.
There has already been a sharp correction in US tech stocks over the past six months. What to expect from Europe?
I note that history often tends to repeat itself. In the early 2000s, when the Internet stock bubble burst in the United States, many people thought Europe would be spared. But we know what happened next.
American companies are rapidly adjusting their capabilities to the new reality. Therefore, I believe that European tech companies will not escape this trend. We see this with startups like Klarna, a high-growth Swedish fintech that recently underwent a major restructuring. This is also the case for a company like Gorillas, active in ultra-fast deliveries, which laid off a large part of its employees. We will continue to see significant turmoil in the tech world. A totally different reality is unfolding.
Given the many current difficulties – whether related to the war in Ukraine, the pace of monetary policy tightening by central banks and, more generally, the risk of recession, I also expect a possible continuation of the market correction. Nonetheless, I think the current environment is attractive for private equity and alternative investments.