Democratised capital: a game-changer for Singapore's businesses

If you are a white collared professional dismayed after years of hard work clocking 15-hour days, 6 days a week, you might start to wonder what the most effective way to manage your personal investment portfolio is — and the answer might be a lot more accessible than you think.

The old rules ensured that the rich had get-richer tools that were kept away from the rest of us because we allegedly didn’t know how to use them safely. Yet there has been phenomenal advancements in automation and machine-learning that help break down complexities and enhance conventional decision-making processes.

To avoid devolving into an economy of a few lords and a whole lot of plebeians, we need new mechanisms that encourage capital flow amongst the wider population and not just an elite few. By breaking the monopoly of the rich, democratised capital gives the middle class a fighting chance to build our portfolios, whilst ensuring niche businesses can raise capital efficiently, granting it a place in our investment palate. This is surely a worthy goal for society-building.

For a start, almost anyone can put their hard-earned money into professionally managed private equity funds. Should a funded company succeed, the proceeds go back to the fund’s investors, similar to a venture capital outfit, except that investors in the fund don’t have to be rich individuals or institutions.

Privately owned businesses running the gamut from consumer retail to hardware, production and agricultural companies have traditionally been overlooked by venture capital firms and the majority of investors. Observers in Singapore have pointed to regulatory compliance and prohibitively high costs being deterrents for local businesses to list on the stock exchange. With a similar trend being observed globally, we’re seeing the rise of alternative funding platforms across the world that have the potential to dramatically change the investment scene.

Democratising capital movement through alternative financing
Alternative financing – instruments that exist outside of traditional channels such as banks and other financial institutions – are emerging to take advantage of opportunities facilitated by new regulations, bridging the gap for businesses to reach the point of bankability. Some common forms of alternative funding include:

Crowdfunding involves raising funds from a large number of individuals who each contribute a sum of money. Investors may receive returns in various forms which include physical rewards, equity, or the return of their investments with interest. Some notable crowdfunding platforms are Kickstarter and Indiegogo.

Unlike crowdfunding, investment marketplaces do not focus on raising funds from a crowd. Marketplaces function as a conduit to link suitable investors and businesses, providing curated co-investment opportunities alongside institutional, professional investors who have done their necessary due-diligence and valuation exercises.

Beyond fundraising, private exchanges provide an avenue for secondary trading and subsequent liquidity events, enabling investors to purchase shares of non-listed companies. This represents a venue for SMEs to raise capital without the constraints of being listed while allowing investors access to a wider selection of companies.

Managed funds clearly have their advantages, mainly providing access to investments opportunities that individual investors would otherwise have not been able to access. Here are three more key benefits for investors:

1. Spreading risk through portfolio diversification
As with any form of investment, participation in professionally managed private equity funds carry a degree of risk, potentially resulting in forfeited funds. However, it offers investors the opportunity to diversify their portfolios among a whole host of different investment vehicles, which has the benefit of mitigating risks caused by fluctuations in market value.

In the event of adverse market movements, investors holding positions in individual stocks will bear the full brunt whilst managed funds that can hold up to hundreds of different investments across various sectors and geographies will experience vastly reduced implications.

2. Negotiating power
Costs can often be defrayed when fund managers manage to negotiate better deals on a bulk-buy basis. The net result: you might end up with significantly better terms than on an individual investment basis. Managed funds by-and-large provide their investors with ‘savings’ when accessing products, markets, and strategies that rely on economies of scale.

In the recent past, professional private equity money managers would not have considered entertaining investors who did not have US$1 million or more to deploy. Technology and flexibility of regulation has changed all that, with specialised pooled investment trusts structures created for the “smaller” investors seeking to run an active, diversified, international private equity portfolio with as little as US$50,000.

3. Simplicity
This last benefit shouldn’t be understated. Participation in a managed fund means your paperwork is sorted; the activity of buying and selling, the collection of dividends and even rights issues will all be handled by a professional fund manager. You’ll receive regular reports on the fund’s (and therefore, your investment’s) performance. Handy, considering the necessity of active portfolio management to achieve alpha in today’s market.