Democratization of Financial Opportunity

Not all investment opportunities are created or distributed equal

As globalization accelerates, investors are seeing a significant uptick in the types of opportunities available to them. From derivatives, art, venture capital and beyond, investing is as dynamic a field as it has ever been. Unfortunately, while the opportunities may be new, the old, arbitrary restrictions on who has access to them remain.

Political and structural issues, around the world, still prevent many investors from participating in the best investment opportunities. This is a problem with several dimensions. As a case study, we shall focus on the US market to highlight some of these dimensions, but the same ideas apply in most developed economies.

Persistently low interest rates limit investment opportunities

First, in developed markets, sustained artificially low interest rates since the 2008 recession have propped up asset prices in public markets as cheap capital seeks yield unavailable in the savings or bond markets. This has been a boon for those invested in public stocks and disastrous for those holding their capital in savings.

Figure 1: CPI vs Fed rates over 20 years (Investopedia)

Officials from the US Federal Reserve expect that long term interest rates will settle at 2.5% which, when taking out the effect of 2% inflation, leaves investors with a paltry 0.5% real return. This is compared to the mid 2000s and the 90s where real rates were closer to 3–4% (Figure 1).

Figure 2: Cash Allocation By Generation (BlackRock)

In effect, the recent decade of low Fed rates has effectively meant negative real (post inflation) rates of saving. This has a pronounced impact on the younger generations, in particular millennials, the majority of whom are risk averse having lived through the 2008 recession and chose to hoard cash rather than invest (Figure 2).

Older generations and those with the means to invest, have used the low interest rates to gain an ever greater advantage. The flood of capital has pushed public stock markets to all time highs, with the likes of S&P500 and Nasdaq indices seeing 25% gains in 2019 alone. This is significant, especially considering that the returns over the past decade have averaged

13.8%. Along with the stock market, the overall US economy officially recorded its longest expansion period in history, as of mid 2019, heavily enriching those who owned a piece of it.

More than 50% of Americans, however, do not own stocks and are thus not participating in the gains. The top 1% of Americans now hold as much wealth as the middle and upper-middle classes combined. This concentration of financial opportunity has translated to extreme wealth inequality that is divided by age and wealth brackets.

Private opportunities are becoming more attractive but are only available to the wealthy

Second, as public asset prices rise and savings rates remain low, investment options that offer attractive yields become more limited, causing capital providers to rush to seek options in private markets.

Private markets, by definition, are exclusive and are fraught with obstacles such as high investment minimums, legal accreditations and long lockup periods that restrict participation by retail investors.

Investment minimums for alternative investments such as real estate, venture capital or hedge funds are often $100 000 or more, amounts that are completely out of the accessible investment range for the average investor. In addition to the minimums, in the US in particular, only accredited investors may invest in alternatives. To become an accredited investor you need to have a net worth of at least $1m or annual income exceeding $200 000. This means that most Americans are legally excluded from making certain investments which, according to SEC estimates, is 96% of the US population.

These structural limitations make it both costly for issuers of alternative investments to raise capital and limits the participation by the general public into many investments.

Investors in emerging markets are excluded from global investment opportunities

The third dimension that prevents many investors from participating in the best investment opportunities — beyond issues with accessing private markets — is that of geography. Until now we have only spoken about the lack of financial inclusion in developed economies; in their emerging market counterparts, the lack of financial inclusion is even more apparent.

Investors from emerging markets primarily have their wealth depleted through the negative impacts of high inflation. In addition, they are excluded from investing in promising investment opportunities due to regulatory factors such as capital controls or structural financial problems such as high cross border payment costs.

World Economic Forum, Trading Economics

Venezuela and Zimbabwe have seen their economies decimated by hyperinflation this year, with current annual inflation rates as high as 10 000%+ and 500%+ respectively. And if you want to get your money out of an emerging market, the average cost of a cross border payment can be well above 10% of the remitted amount, severely limiting the global investment opportunities in those markets.

Severe capital controls in emerging markets also limit the investment options available to local investors. Capital controls are principally used by governments to limit capital outflows and manage foreign exchange rates. China is perhaps the best known example of restrictive capital controls where citizens, who are only allowed to transfer $50 000 out of the country each year, have been denied sending money overseas for obscure reasons such as being too old. Recently, controls have become tighter and limit any purchase of foreign property or insurance. This leaves investors highly exposed to the performance of the local economy and little chance of diversifying their wealth.

With the limited investment options in emerging markets, coupled with the effects of high inflation, remittance costs, and restrictive capital controls, it is no surprise that many investors turn to digital assets as investment alternatives. South Africa, Nigeria and Ghana have some of the highest global crypto-asset ownership rates at 10.7%, 7.8% and 7.3% respectively. The desire to earn a return and protect their capital has exposed the emerging market investors to unnecessary degrees of risk.

The net result of these three dimensions is that an entire category of investors are systematically left out of financial opportunities. Among other deleterious impacts, this exacerbates a growing inequality by quite literally allowing the rich to get richer while denying others the opportunity to benefit.

A new investment platform for a new global investor

We at Invictus Capital, however, believe that these investors (from both developed and emerging markets) should not be excluded from investing in these opportunities due to geographical or wealth impediments.

We’ve built a suite of tokenized fund offerings that would ordinarily only have been available to high net worth or institutional investors. Our funds represent an expansive range of alternative investment asset classes including private credit, venture capital, digital currencies and energy infrastructure. Typically these categories preclude the majority of investors from participating due to factors such as high minimums and multi-year lock-ups. We seek to change this paradigm with our investment platform.

We’ve developed our platform using a blockchain-based layer blended with a simple intuitive UI. This combination offers our community unparalleled benefits:

  • Instant onboarding. Our platform caters to a global investor audience and the only simple requirement is an internet connection and browser. Investor onboarding is completely automated and can be completed within a few minutes.
  • 24/7 liquidity. Subscription and redemption from traditional funds can take days if not weeks. Using smart contracts, we offer investors the ability to redeem their investments within hours rather than days.
  • No investment minimums. We have facilitated hundreds of micro investments of less than $10 dollar into investment products that have typically only been available to the extremely wealthy.
  • Transparency. Traditional asset managers rely on central custodians to manage asset holdings. Blockchain allows individuals to hold the keys to their own investments and adds an additional layer of public transparency that enables investors to track the number of available tokens and their holders.

This type of functionality is crucial to achieving inclusive, democratic access to financial services. These benefits are echoed in the responses we received in a recent survey we conducted with our community.

Key findings are:

  • 74% of respondents say they do not trust banks or local investment institutions.
  • 80% of investors would prefer to make investments outside of their local currency and;
  • 50% invested in our funds to protect savings from local inflation. Investors in territories suffering from hyper-inflation rely on investments that are not denominated in local currency so as to preserve capital value.

Our platform provides a powerful opportunity to disrupt the traditional asset management sector by offering access to global investment opportunities at extremely low costs. According to a Deloitte study, blockchain tech can reduce fund administration fees by up to 80%.

We are uniquely positioned to take advantage of this transition, having developed our blockchain-based platform and launched 5 tokenized funds to date. Our community of 15 000 retail investors from 150+ countries have cumulatively invested over $40m across multiple funds, helping us guide the way to more financially inclusive world. We hope to expand on this vision by offering more innovative products across multiple asset classes.

A glimpse of the future is available today — with Invictus Capital you can build wealth from anywhere in the world with just a smartphone and an internet connection, and with that we hope to be one step closer to bridging the immense gap in global financial equality.

To find out more visit the Invictus Capital website or our social channels: Telegram and Discord.

Kind regards,
Nick & the
Invictus Capital team

Democratization of Financial Opportunity was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.