A London-based startup which hosts venture capital funds has begun to enter into partnerships with wealth managers who want to give their clients access to a broader array of assets.
Sprout, an investment platform which launched just over a year ago, wants to eventually become the go-to place for people investing in private markets.
While some firms are talking to Sprout on an informal basis, allowing individual advisers to choose whether or not they want to use the platform, others - generally bigger wealth managers across the UK and abroad - are considering more formal relationships with the platform.
More and more wealth managers are advocating VC as a diverse asset class.Mohit Kirpalani Lalwani, SproutSprout’s co-founder and chief executive, Jonny Blausten, is a former mergers and acquisitions consultant. He worked on deals such as General Atlantic’s investment in Gymshark back in August 2020, which took the British sportswear group to unicorn status.
Mohit Kirpalani Lalwani, Sprout’s head of relationships, is a former financial adviser. For over three years, he was a partner at St James's Place Wealth Management based out in China.
“I always got questions from clients on alternative assets. The volume of clients asking about it has increased substantially,” Kirpalani Lalwani told FTAdviser.
“This is something wealth managers aren’t offering their clients. A lot of them are looking at us to invest their own money, then actively referring us to their more sophisticated clients.
“More and more wealth managers are also advocating VC as a diverse asset class. It’s outperformed the FTSE for 20 years now.”
Right now, however, some have pointed to a ‘silent venture capital crash’. Shares in some of the tech industry’s largest startups - particularly buy now, pay later companies like Klarna and Affirm, have fallen dramatically in recent months.
But despite this year’s market volatility, which has also hit equities hard, alternative investments - which are made up of a mixture of private equity and hedge funds as well as venture capital - have become a major growth area for traditional asset managers.
There’s a whole range of people waiting to be engaged.Jonny Blausten, SproutIn May, Franklin Templeton agreed to buy Alcentra, one of Europe’s largest credit managers in a deal worth up to $700mn.
Private assets tend to command higher fees, securing investors’ capital for several years. Simultaneously, traditional 60/40 portfolios - which consist of equities and bonds - have begun to fall as asset managers look to alternatives.
Growth in alternatives has gained such a pace that the Financial Conduct Authority recently warned fund managers of alternative assets against “bypass[ing]” their own processes in order to grow sales and the number of assets on their books.
‘You’re building a portfolio with a low percentage to go big’
Exposure to VC is very low for investors, Sprout’s boss Blausten explained.
“We’re starting to see the stories of startups unfold…And you’ve got a financial awakening in millennials. They’re much more savvy. Throw tech on top, and there’s a whole range of people waiting to be engaged,” he said.
“Sprout is a platform which allows qualified investors to prove their eligibility and browse VC funds which have an information pack attached to each one.
“Whether your ticket is £5,000 or £500,000, Sprout is the platform for you because a lot of these top funds - the minimum you need to invest is usually between £1mn and £5mn.”
Historically, retail investors have been able to take a punt on an individual startup, but the chances of them failing is high. Nearly 67 per cent of startups stall at some point in the VC process and fail to exit or raise follow-on funding, according to CB Insights.
We’re speaking to a fund at the moment which plans to invest in 100 startups. They expect four of those to go huge.Jonny Blausten, SproutThe idea of Sprout is to give investors the opportunity to invest smaller amounts in a group of VC-backed startups via funds designed to ride out the high failure rate of the majority of companies and capitalise on the few which make it.
“We’ve seen clients putting money into speculative startups. We see people putting as much as £100,000 into one company,” said Blausten.
“This is a smart way to do it. The maths shows the vast majority of startups fail, but you’re building a portfolio with a low percentage to go big.
“So for example, we’re speaking to a fund at the moment which plans to invest in 100 startups. They expect four of those to go huge, and they expect seven to be pretty big. They run through the maths of it, and that still gets you to a five times return on the whole fund. And that’s with 40 per cent of them failing.”
If you go into a fund and there’s a failure that’s fine, Blausten added. “The fear is going to zero. But the funds we’re working with - the worst performing of them have still achieved 15-20 per cent a year historically.”
We want advisers to think of us when they get questions about VC.Jonny Blausten, SproutSprout charges a one-off structuring fee, and then each fund charges an annual fee which reduces the more an investor invests in it.
Blausten said the company can hold advisers’ hands throughout the process, acknowledging VC is a new asset class many might not currently be familiar with.
“We can help them with the education piece,” he said. “We want advisers to think of us when they get questions about VC.”
ruby.hinchliffe@ft.com
