Have you ever considered setting up an investment fund so that you can manage other peoples' money and earn fees from doing so?
If so, you will have realised how many barriers to entry this industry has put up:
- The fund management industry is a maze of regulations, and you will need expensive professional advisors to guide you.
- You will also need a legal entity to serve as your fund, and there are hundreds of variations to choose from.
- You could easily spend USD 50,000 and possibly up to ten times as much just to set up the fund.
- Creating a fund will generally take three months at the least, probably more like one year.
Service providers, consultants and even national regulators will make it sound easy and quick when you speak to them, but along the way you are likely to come across so many unexpected roadblocks that you'll curse the day you ever decided to do this.
There are already cheaper and faster options offered on the Internet. However, these often involve severe limitations. E.g., you may be able to set up a fund entity in an exotic jurisdiction, only to find that banks in the Western hemisphere refuse to open a bank account for you. If you open a bank account in one of the few exotic locations that serve such entities, you might find that your investors are not overly keen on sending their money there.
Creating a fund that you can use to manage third-party money is a highly complex undertaking. You'll first make lawyers and other professional advisors rich before having a chance to make money for your investors and yourself.
Does that sound like an industry that is ripe for disruption?
A handful of companies do think so.
One of them is based in London. Hardly anyone has heard of them yet, but I believe that's set to change soon.
If you have ever considered launching a fund, this may be the service provider you have waited for. I have tracked their progress for a while and recently concluded that they may be about to take off. Keen to write about this company before other media outfits latch onto this exciting story, I met up with them to get a first-hand impression, a demo, and some up-to-date information.
As a heads-up for my readers: there is no specific investment discussed in this article. You'll find this article interesting if you are looking to manage a fund or if you want to learn about the disruption and containerisation of the fund management industry.
An industry ripe for innovation and disruption
In theory, setting up an investment fund should be neither complicated nor expensive.
After all, a fund is simply a legal entity that allows people to pool and deploy capital. It's simply a company by another name. The idea of investors pooling money and putting a manager in charge of the investments has been around for centuries.
However, the fund industry is highly regulated, and it's been held hostage by several groups of professional advisors.
"How much did you pay to set up your new private equity fund?" I recently asked a friend over lunch.
"All in, it was about GBP 250,000", he replied.
The fund industry is so diverse and complex, that it's very challenging to compare legal entities, jurisdictions, and costs. Each case differs to such a degree that I am reluctant to use simple comparisons.
E.g., you can buy a car for GBP 20,000 (Volkswagen Golf) or GBP 250,000 (Rolls-Royce). Both are cars with four wheels and an engine and designed to take people around. However, no one would question that they are entirely different products and aimed at different target groups. A potential Rolls-Royce buyer will never even consider the Volkswagen Golf. Having the option to buy a Volkswagen Golf does not mean that Rolls-Royce will go out of business.
It's the same with the fund management industry. Someone who wants to market a fund to retail investors in the EU will probably continue to opt for the uber-expensive, highly-regulated UCITS-funds coming out of Luxembourg. They will never consider the cheaper, easier-to-handle Cayman Islands-based fund because retail investors in the EU cannot easily buy them. Comparing the costs of the two is irrelevant.
However, what is relevant is the process used to create these funds. The cost it takes to create such legal entities and everything they require to comply with regulations is a significant cost factor, and that applies to the entire industry.
To stick to the example of cars, the fund management industry has not yet seen its Henry Ford. Cars only became affordable mass products once Ford came up with the idea of an assembly line. However, new funds are still assembled by hand, with many professional advisors asking for payments along the way, often for work that is 90% standardised.
Hold that thought and imagine how a "fund assembly line" should look like in the Internet age:
- A web platform that lets you choose what kind of fund you want to create, as well as all its features and parameters.
- Artificial intelligence software that creates all the documents based on templates, instead of hiring expensive humans each time a document needs to be created.
- A commoditised process so cheap that you can easily set up investment funds even if you want to pool a relatively small amount or buy just a single investment.
That's exactly what Vauban.io has created: a digital platform where you can set up and manage a fund without ever having to leave your house. The process is fast and comparatively cheap because everything is automated and web-based. What used to be done by lawyers, will (mostly) be done by artificial intelligence and a proprietary platform.
Vauban's funds are called "wealth containers", a nod and a wink to the fact that containers brought scale and cost-efficiencies to the global shipping of goods. Before containers came to shipping, that industry had been highly ineffective. Vauban wants to do to fund management what the invention of standardised shipping containers did for cargo shipping. Costs fell dramatically and as a result, the overall market became much bigger.
Vauban is a start-up, and hardly anyone has ever heard of them. You'll be surprised, though, how far the company has come already. At least, I was!
The market has already given its verdict
When I first heard of Vauban in November 2020, they had launched 120 funds for clients. The funds collectively held around USD 250m of client assets.
Fast-forward six months and the company has already created over 250 funds for clients. These funds now hold over USD 500m in client assets.
Not only does this represent 100% growth in six months, but these are also absolute numbers that matter. If the company had five funds with USD 3m in client assets, I'd say the founder and a few employees pulled in their friends and family to create a few case studies – which is of limited use. What we are seeing here is serious acceptance by the market. You don't get to create over 250 funds and have investors pay over USD 500m of cash into the funds if the solution isn't good. These figures provide evidence that serious people have started to accept the solution offered by Vauban.
Even though I don't like reprinting any company's own PR blurb, it is useful to check how Vauban describes itself:
"Vauban is a Wealth Container Platform which simplifies the deployment and maintenance of complex legal entities like Funds. We've brought everything under one roof, in our online Dashboard.
Excessive paperwork, wax seals, and numerous providers like lawyers, bankers and administrators who charge by the hour, meant that launching a Fund was once a disaggregated, slow and expensive process.
Until now: Vauban has digitised and automated the process to make it accessible, save you time and money, and launch your Fund efficiently."
Where is the catch?
Platforms that offer to set up a fund for you have existed for a long time. They used to be called hedge fund hotels or fund manager platforms.
However, none of them was digitised. Some claimed they were, but in reality they were just offline services with a glorified online component. Lawyers and bankers who use email do not make for online law firms or online banks. Digitising an industry is no small feat.
In that sense, Vauban could be a game-changer. It's something I had hoped for years someone was going to create eventually. Many (not all!) lawyers who work for the fund management industry make a good living out of copying/pasting existing documents and making only relatively small adjustments. It was about time someone disrupted their business model.
I find it remarkable that Vauban has grown to over 250 funds and over USD 500m in assets without having done any advertisement. In fact, the complete lack of advertisement was what led me to sit down and write this article in the first place. Vauban's Twitter account has just 74 followers, and there isn't much about them on the web. Vauban confirmed to me that they have mostly grown on the back of word-of-mouth, i.e. satisfied clients recommending the company to other people in their network.
It makes me wonder, how busy will they become once the company makes a bigger splash through advertisement and PR?
The company certainly has an interesting pedigree. In the second quarter of 2020, Vauban raised seed funding from a group of investment outfits. This included Pi Labs, Europe's most active proptech funder (about whom I once wrote an article on my personal website following an interesting dinner with their team). Another shareholder is MJ Hudson, a major law firm specialised in the asset management industry. You wouldn't have specialised lawyers buy into the concept if it didn't have legs.
However, it's also important to stress that the company is still at a relatively early stage. Its team has a lot of work ahead of itself.
The concept may work for some asset classes but not for others. Will it work for the highly regulated business of retail funds? I am not sure. Is it a good solution for less regulated asset classes like private equity or property? Absolutely! Incidentally, Vauban is currently positioning itself primarily for private markets, such as venture capital and real estate investments. Real estate alone is an asset class with USD 35tr in assets globally.
What sort of licenses does someone need to hold to become a fund manager? This will differ from jurisdiction to jurisdiction, i.e. it also depends on where you live. For some funds, you might not need a license at all. As of yet, the Vauban platform does not provide the answer to this question.
Can such funds be marketed in the most important jurisdictions, such as the EU, the US, Hong Kong, Singapore, Australia, South Africa and Japan? Maybe, maybe not. I'm aware that fund distribution across jurisdictions is a horrendously complex affair, and again couldn't find an answer on the Vauban website (yet). Helping funds with marketing permits in jurisdictions around the world is a small industry of its own, i.e. it's one of the sub-industries of professional advisors who make good money out of guiding their clients through the maze.
How will Vauban differentiate itself from competitors? There are three comparable firms, two of which seem to be in a much earlier stage while the third one is bigger than Vauban, but very US centric. For now, Vauban has the slickest presentation for the idea of outsourced and streamlined fund launching that I've seen. It's like Robinhood but for fund managers. However, like in any other business, there is competition and it remains to be seen how the competitive landscape evolves.
That all said, Vauban never claimed to have all these answers just yet. The company is still in an early stage, and its team is seemingly so well-connected that it can work largely off the radar using its existing industry contacts. When someone thrives without shouting about it from the rooftops, they pique my interest.
Keep an eye on it – or contact them for questions
Vauban had 24 employees when I visited their office in the City of London, and are planning to double this number by the end of the year. It doesn't take much to figure out that this is one of the more serious finance-related start-ups to come out of London. Not only is MJ Hudson a shareholder, they have also been given office space in the same building as the law firm.
Meeting them reminded me of two other encounters I had with finance-related Internet firms in London.
In July 2015, I attended a dinner where Yoni Assia spoke, the founder and CEO of eToro. This was in a pokey basement restaurant in Fitzrovia and hardly anyone outside the world of online trading had heard of Yoni back then. Today, eToro is a USD 2.5bn IPO candidate.
In January 2019, I met the team of PensionBee, a company that allows Britons to combine their pension savings on one easy-to-use platform. PensionBee was growing rapidly because they had – in essence – created a blog-style platform of content, which I am sure some people in the finance industry sneered at. The company has just done an IPO at a valuation of GBP 365m and its 35-year old founder is now worth a cool GBP 140m.
Leaving the Vauban office, I thought: "This company is gonna be another one of those."
Investing in Vauban itself is currently off-limits to anyone but professional venture capital firms. As ever so often, the world's truly exciting venture capital investments are kept within a small circle of insiders. The public gets invited to invest at a later stage.
However, it's now actually up to you to change that. Are you an expert – or "insider" – in any particular industry?
More easily than ever before, you can market your skills by creating and managing a fund where you manage other peoples' money in exchange for a management fee and a performance-based fee. The digitisation of the fund industry, as demonstrated by Vauban, is going to give would-be fund managers the opportunity of getting started.
Setting up a fund is all the better if you do it for an asset class where "insider information" can be used legally – as described in last week's Weekly Dispatch "Should insider trading be legalised?".
Here is an opportunity for budding fund managers among my readers, and you can be right there among the first adopters and innovators!
If this sort of stuff interests you, check out Vauban's website: www.vauban.io
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