The effort to make alternative investments widely available to the wealth channel has included innovation from all sides.
Asset managers are creating entry points that provide some liquidity, feature simplified tax structures and lower minimum investments. Third-party providers (most prominently CAIS and iCapital) have worked to build marketplaces where advisors can learn about alternative asset types and research funds listed on those platforms. But there’s another piece of the equation: infrastructure that digitizes the alternative investment process from end to end, including the pre-trade, trade and post-trade workflows.
Both CAIS and iCapital have steadily rolled out product enhancements as they strive to move from being marketplaces to full alts platforms. But a less-heralded player, SUBSCRIBE, has quietly established a foothold in this regard.
SUBSCRIBE is led by Chairman, CEO and founder Rafay Farooqui. Farooqui was one of the co-founders of CAIS in 2009 and served as president there for six years before moving on and creating SUBSCRIBE as a new company. (He retains a minority stake in CAIS.)
The privately funded firm supports over $6 trillion in private market assets, processes over $1 billion a week in subscription documents, has 11 million legal accounts in its system, and counts 4,000 investors as clients, half of whom are advisors and the other half institutional investors.
On the wealth management side, Sanctuary Wealth, Balentine, Morton Wealth, MassMutual, the Glenmede Trust Co., and Fiduciary Trust Co. are among the hundreds of advisory firms signed onto the platform. Meanwhile, asset managers including Alliance Bernstein, Carlyle, Cohen & Steers, Goldman Sachs Asset Management, J.P. Morgan Asset Management, Morgan Stanley, PIMCO and T.Rowe Price are also using SUBSCRIBE.
In one recent example, Legalist, an alternative credit firm that uses technology to invest in litigation finance, joined the platform. Legalist will serve as the platform’s exclusive litigation finance partner, while SUBSCRIBE will provide Legalist access to its wealth management users. SUBSCRIBE will also supply the wealth managers interested in Legalist with due diligence materials from an independent third-party consulting firm.
Legalist funds are open to qualified purchasers and require a minimum investment of $250,000 on the platform. One of the cases Legalist has taken on since its launch in 2016 is helping people affected by the 2017 Equifax security breach to sue Equifax in small claims court, promising to waive their fees if they lost. If the claimants won, Legalist was entitled to 30% of their court-awarded sum.
Eva Shang, Legalist’s co-founder and CEO, noted that a significant portion of Legalist’s $1 billion in AUM was already coming from wealth management firms and its institutional investor base before it struck the deal with SUBSCRIBE. But signing onto the platform is “part of a larger foray for us into the wealth advisor and wealth management channel,” she said.
Most of Legalist’s previous investments came from the research departments of wealth advisory firms. “But I know there are a lot of smaller wealth advisors that don’t have a dedicated research team, so I think that’s where the SUBSCRIBE relationship really comes through,” Shang said.
WealthManagement.com sat down with Farooqui to discuss SUBSCRIBE and its place in the alts ecosystem.
This interview has been edited for style, length and clarity.
WealthManagement.com Let’s start with your background. How did you become focused on alternatives and how did you end up launching SUBSCRIBE?
Rafay Farooqui: I grew up in New York City, attended Columbia University, and then found myself in a job with Goldman Sachs on their equity sales trading desk in 1998. Essentially, I was taking orders to buy and sell stocks. Equity markets were really hot, and the hedge funds were trading up a storm. I was tasked with covering all of them.
As I covered the sector, relationships were built. These were my clients, and I knew them well. But the type of firms that we covered started to expand as private equity firms also started buying stocks through PIPES.
I spent about six years at Goldman and 12 years on Wall Street. I saw a few crises, including the dot.com bust, the Long Term Capital Management unwind and Russian debt explosion, and then the financial crisis of 2008. When that happened, I decided to leave the banks and go on my own to build a business.
As Matt Brown described, we came up with CAIS on the back of a napkin. The managers that went through the financial crisis lost a lot of capital and institutions were not allocating anymore. We felt we could get them to a new audience and find the capital they needed.
With CAIS, we wanted to provide vetted access to brand-name managers. At the time, it was all in feeder fund format. Feeder funds are now a secondary and expensive thought. Direct access to products is what’s happening today. We were so successful that iCapital entered the industry soon after as well.
As we were building CAIS, I had a theory about where private markets were going. Based on looking at other industries that digitally transformed—when you call a taxi, you press a button; when you order a meal, you press a button; when you watch a movie, you press a button. But for investing in alts, there wasn’t a button. We had created marketplaces, but it was the same analog, paper-based, process with no buy button or operating system.
WM: So that’s where SUBSCRIBE fits in? It’s about being a ‘buy’ button and ‘operating system?’
RF: Yes. My early vision of alts in the wealth space involved three phases of transformation. The first was democratization. The next phase was creating a robust infrastructure. The third phase was investment lifecycle management.
From 2009 to 2015, democratization is what we both (CAIS and iCapital) did. And around 2013 or 2014, Blackstone wrote a white paper and formed BREIT. They hired a bunch of people to sell directly to the wealth channel.
We had been building for 3 1/2 years, and few were listening. All of a sudden, you have Blackstone write that white paper, say, “This is the future,” and then we are off to the races.
iCapital mainly focused on wirehouses and purchased their feeder fund businesses. CAIS grew from the ground up, selling to RIAs. All of us were coming together to tackle the advisor market.
So, it was clear to me that when you have such growth, you need the infrastructure—the pipes and plumbing—to be rebuilt. We were running out and raising funds, and everyone was tasked with paper subscription documents. More products were available, but it was putting more pressure on the piping. There needed to be seamless digital systems to support this growth. We needed a New York Stock Exchange for private markets where things just work and scale, and you can sell to anyone and buy anything.
The third phase, once you build out the infrastructure, is having turnkey alternative asset management programs. That means the ability to find everything you want, trade everything you want and optimize everything you have. It means portfolio-building, model portfolios, risk analysis, trading at scale, data sloshing back and forth and systems operating in an interoperable way.
WM: This sounds to me like what iCapital and CAIS have been talking about of late in terms of building out their product sets. How did SUBSCRIBE end up as a first mover and being a separate business?
RF: One of the reasons I left CAIS to form SUBSCRIBE is they didn’t see value in the software-as-a-service services. They wanted to focus on sales and marketing as an organization. In a tech company, most people code. At our company, 70% of our employees are coders. At CAIS and iCapital, a smaller portion of their staff are engineers. This is the main difference. I should also note my wallet never “left” CAIS, as I am still founder/owner and excited by their success.
CAIS was about democratization. SUBSCRIBE, which is our business today, is the infrastructure build. I launched SUBSCRIBE the day after I left CAIS in March 2015, and we have become a global leader.
Sometimes being a visionary can be lonely. You don’t know if you’re crazy, you’re early or you’re wrong. I think that was true of our idea with CAIS. It turned out we were early, and we were right.
The same thing has happened with SUBSCRIBE. I didn’t know if people would press a button to buy Blackstone. I just thought this was happening in other industries and we should try.
For a while, we were building, and nobody cared. Everyone asked, “Doesn’t DocuSign do what you’re doing?”
If you take the average wealth management firm, they are setting up their own funds and buying off these platforms. When they buy from CAIS or iCapital, there is some automation. But when they buy stuff they find on their own, they are back to emails, PDFs, etc.
We built an open architecture system where fund investors can bring their own documents, and fund managers can bring their own investors. They needed a button for every time they wanted to consummate an investment. What started happening was every wealth firm that had access to CAIS and iCapital started to request access to SUBSCRIBE to digitize all their other funds. Some even said, “We like the funds we find there, but we don’t like the buying experience. Can you operate them?”
At this point, it must have occurred to others that they, too, must become technology platforms. Since they’ve launched CAIS Solutions, that’s an answer to our success in the market and a validation that we were ahead. iCapital has recently launched a similar initiative.
So, when you say they are all talking about the same things, that’s because we’ve had great success, and the market is demanding automation from everyone.
WM: Where does your revenue come from?
RF: With other software, you pay a monthly SaaS fee. We were determined that we wanted to be a tech and software company, so our fees are for our tech. That’s night and day with CAIS and iCapital, where the majority of their revenue comes from their AUM. Our clients are fund managers, investors, law firms and fund administrators. They are buying the software. Today, we have 5,000 private funds across 3,000 fund managers and 4,000 fund investment firms on the platform.
Software should deliver outsized value and lower operating costs—it was ironic that in our industry, “tech” platforms seemed to be increasing the costs for everyone to do business. We’ve prided ourselves on enabling managers and investors to go further and not putting our hand out on their fee revenue. If I’m Blackstone and I’m hiring 300 people to target the wealth segment, I have enough people to pay.
WM: What does it look like when a fund manager signs on to SUBSCRIBE?
RF: Take a top asset manager in alternatives. What is their challenge? They are now building products for this channel in every region. They also have traditional institutional investors. They are building sales staff to serve advisors and institutions, but they don’t have a tech delivery apparatus.
They need a singular place to put their institutional and retail funds. They need all external and internal sales on the same platform then to be able to connect and engage current prospective investors in a central venue.
The experience with SUBSCRIBE is you end up with an Amazon.com of private market services that connects everything to a center point and has a killer app in our ‘buy’ button.
This can accelerate sales because logistics and operations are seamless. They can focus on high-value interactions and strategies. They pay us flat enterprise fees. They are not paying us on the billions they transact on our platform, and that is a good thing.
WM: What about on the other side, the fund investor?
RF: 50% of our business is institutional; however, about three years ago, we were approached by one of the nation’s largest IBDs. This wealth management broker/dealer has hundreds of billions in AUM. In alts, they were investing a few billion a year across 40-odd registered funds, unregistered funds and other private investment funds.
They needed to scale their operations. Our tech solved many of the compliance needs, end-to-end processes, digitized paperwork and integrated into internal systems. They did an RFP and called everyone, and we were selected.
I think that was a moment when other firms may have realized they needed to enhance their tech offerings. The IBD didn’t need a menu of investments, feeders or education. It needed an alternative operating system.
We support their end-to-end processes from education to advisors, validation checks, advisor registrations, account information, investor pre-qualifications, sales kits and deliveries, order validations and concentration checks. It allows compliance teams to review orders, and it’s integrated into trading systems and downstream to reporting. We are the alts OS for this IBD, and we subsequently won a few more as well.
WM: There are some other players on the tech side on alts as well, aside from what we’ve talked about. Is the market becoming too crowded?
RF: If you are building a company and building a solution to solve one pain point, I believe you are in trouble. What you need to be building are end-to-end platforms and enterprise solutions that solve a lot of things for a lot of people.
If we had just built an electronic subscription tool to address the trade issues and gave that to everyone, once you sold that, you have nothing else to do. We knew we had to do pre-trade and post-trade as well. So, you better be building an end-to-end solution with economies of scale if you want to be around.
If you do build a good point solution, you might get acquired or rolled into something. The few players with end-to-end solutions, however, should reap the majority of the spoils. Others may run out of cash, lose their footing, get acquired or shut down. We will see this in the next phase.
Our competition comes from both institutional and wealth-focused technology firms. So we not only compete with CAIS and iCapital in wealth, but also with everyone else in the institutional market across the pre-trade, trade, and post-trade continuum, including firms such as Intralinks, Anduin, Canoe and Arch Labs.
Nonetheless, my market prediction is that soon one of the larger players will eventually go public or get acquired with a valuation close to $10 billion. That will float all boats across the industry.
WM: Lastly, you’ve discussed a third phase of alts being fully managed in TAMPs. Could this also come in the form of integration with existing TAMPs?
RF: Because we’ve built trading technology that lets you buy, sell, transfer in bulk and at scale, this is the foundation of TAMP-ization. You see fund managers talking about asset allocation models, and CAIS and iCapital announcing model portfolio initiatives. You will hear a lot more about the intersection of alts and TAMPs shortly.
There is so much deal activity it’s hard to keep up. People are running to the goal from five different directions and they are going to collide in the middle. There are three publicly-listed firms trying to become the end-to-end alts behemoth. BlackRock is one of them with their recent purchase of Preqin. TAMPs like Envestnet and Vestmark will need an alts solution as well. They can’t live without it. Given their PE backing I could see them trying to solve the problem by an acquisition, partnerships, or building it themselves.
Elaine Misonzhnik contributed to this story.
