Private Equity vs. NFTs: Aqua's Investment Advice

The Rise of Alternative Investments and Aqua's Approach

A growing trend sees alternative assets – encompassing items like vintage wines, non-fungible tokens (NFTs), and even shared ownership of artwork – gaining prominence as a mainstream investment option. Investors are increasingly diversifying their holdings beyond traditional stocks.

New York-based startup Aqua is capitalizing on this shift, believing the future of investment may lie in greater access to private markets.

Democratizing Private Equity

Founded by Rohan Marwaha and Dev Patel, Aqua aims to provide all investors with access to private equity funds. Historically, these investment vehicles have been largely restricted to high-net-worth individuals and institutional investors.

Aqua proposes that directing investment capital towards PE funds, rather than conventional options like the S&P 500, can potentially deliver both stable returns and a more diversified portfolio.

“Investors are demonstrably enthusiastic about new asset classes and possess a strong understanding of them,” Marwaha stated. “However, private equity funds offer a comparatively lower risk profile within this broader trend.”

A Two-Sided Marketplace

Aqua functions as a two-sided marketplace, streamlining back-office operations and logistical challenges for private equity firms when dealing with a larger number of smaller investors.

Simultaneously, it extends investment opportunities to those investors with minimum investment thresholds of $10,000, a significant reduction from the typical range of $250,000 to $25 million.

The startup, currently in its pre-launch phase, has not yet disclosed details regarding early platform usage or customer engagement metrics.

Marwaha identified inefficiencies within the private equity sector during his tenure as an analyst at Blackstone, where he worked for under a year.

He observed that many processes within private equity firms were still conducted manually, relying on paper-based systems and even fax machines.

These outdated methods discourage PE firms from engaging with smaller investors, as managing capital calls and distributing returns becomes considerably more complex.

Addressing Logistical Challenges

The co-founder contends that the difficulties associated with smaller investment amounts are not diminishing interest from PE firms.

“A technology-driven solution that handles the administrative burden of managing smaller investors would be immensely valuable to the private equity industry,” he explained. “Firms are eager to attract capital to fuel growth and explore new opportunities, but they wish to avoid the complexities of administrative tasks.”

From an operational standpoint, Aqua acts as a Limited Partner (LP) for PE firms.

It represents a single entity on a PE firm’s cap table, consolidating investments from numerous smaller investors into the fund. Upon realization of returns, Aqua then distributes the profits to each individual investor.

Overcoming Adoption Hurdles

Convincing PE firms to adopt Aqua’s service for fundraising presents a significant initial challenge.

The question arises: will firms be willing to experiment with a novel service when their established processes are built upon a fundamentally different operating philosophy?

Marwaha countered this perspective, asserting that “there has always been interest in private equity funds, but it was simply too challenging for firms to accommodate smaller capital contributions.”

Further information can be found here: https://techcrunch.com/2021/09/03/private-equity-giveth-and-private-equity-taketh-away/

A Cost-Effective Proposition

Notably, Aqua currently does not charge PE firms any fees for utilizing its services.

Instead, the startup generates revenue through a share of the returns, only realizing profits when its investors do.

This model introduces a degree of volatility, as distributions are not as predictable as, for example, recurring revenue from a Software-as-a-Service (SaaS) subscription.

Returns can take between seven and ten years to materialize.

The team is focused on diversifying its asset base and offering rolling return options to ensure the stability of its business and the satisfaction of its investors.

Aqua is also exploring options that allow investors to buy and sell portions of funds at specific times throughout the year.

Early Support and Future Growth

This strategy has attracted a number of early investors and partners.

Aqua has established a partnership with Permira, an asset manager overseeing more than $50 billion in assets.

The company also announced the completion of a $2.5 million seed funding round, led by Gradient Ventures, Google’s AI-focused venture fund, with participation from Y Combinator.

Buoyed by this early validation, the founders intend to expand their team by hiring eight additional employees within the next six months.