A new trend in Consumer Finance: Fractional investment is coming to community-led real world assets
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Summary
- Over the next 30 years, an estimated $30 trillion of wealth will exchange hands from the baby boomers to Generation Xers and Millennials. Unlike their elders, these demographics want to be their own financial advisor and invest directly in companies and themes they believe in.
- However, most Millennials have limited savings facing challenges to invest in inflated assets and have a collective distrust of banks. They also want to invest in assets they understand, trust an can use.
- The democratisation of the stock market with commission free and fractional share offering were the first steps to a broader trend around investing in community-led real world assets.
- Unlike with Bitcoin, luxury and art assets are not fungible. This means that the transaction cannot happen on order books diminishing liquidity and market size.
- We are about to see the rise of community-led real world assets driven by:
- 1. The growth of online secondary marketplaces for luxury store of value items — Consumers want to invest as easily as they do with Bitcoin in sneakers or arts. With a higher number of vetted marketplaces, the liquidity will improve and the price discovery will be more efficient. This in turn will attract more users interested in both the store of value elements as well as being able to use / wear items.
- 2. The democratisation of fractional investing — The move to fractional trading transform non-fungible asset to fungible assets that can be traded via order book based transactions. This is one of the biggest breakthrough in the consumer investing world. Even though there is still a need for over the counter agents to ensure authenticity of the items; trading can finally happen for niche & illiquid assets at scale.
- The wide use of fractional shares will widen the investable asset market by moving exchanges from one-to-one transaction with a broker model to many-to-many transaction with an exchange model.
- A new capital markets ecosystem is created giving opportunity to both entrepreneurs and investors. Companies to watch include Poshmark (Fashion), StockX (Streetwear), Goat (Streetwear) or ThredUp (Fashion) and my favourite Chrono24 (Watch) as well as Rally (Alternative assets) and Otis (Alternative assets and art)
A new trend in Consumer Finance: Fractional investment is coming to community-led real world assets
The 2010s was the best on both an absolute and relative basis for the S&P 500 crushing all of the main asset classes with a 246% return over the past 10 years. The generation benefiting the most from the recent stock market appreciation was the baby boomer who had more time and more disposable income to invest.
However over the next 30 years, an estimated $30 trillion of wealth will exchange hands from the baby boomers to Generation Xers and millennials. These demographics invest differently than their elders. For instance, they are digital native generations and have a collective distrust of banks. This is translated in 46% of Millennials thinking investing is “risky” and 60% having a distrust in financial markets, and a whopping 70% holding their savings and investments in cash. At the same time, 87% of Millennials feel empowered to make investing decisions on their own. (Source Blackrock, BI, Federal Reserve).
In other words, Millennials want to be their own financial advisor and invest directly in companies and themes they believe in and understand. A common example is the rise of ESG and sustainable investments driven by younger generations changing the way companies and asset managers behave.
However, before the $30 trillion of wealth happen, most millennials and Xers will continue to have limited savings — on average $8k for Millennials — limiting their access to most financial products e.g. how do you invest in Amazon Stocks at $2k+ if you only have $50 to invest?
Fintech consumer companies were the first to adapt their offerings to target these demographics by enabling younger and first-time investors to access the financial markets. Features such as no commission fees and fractional shares was a recipe for success as seen with Robinhood’s 10m+ registered users.
Democratising the stock market is the first step to a broader trend around democratising community-led niche asset classes. In the traditional world, alternative assets include real estate, private equity and real assets. Apart from investing in Tech stocks, Millennials are looking to invest in alternative asset classes that they understand and even use, like sneakers, vintage watches or art.
A recent example of community-led asset is Bitcoin albeit completely digital, with over 90% of millennial preferring Bitcoin to gold
- Communal discussions on social media and forums which users can participate without relying on traditional financial outlets are providing a more intimate investing experience to a generation comfortable with (over)sharing. Bitcointalk was the place many first time buyers exchanged and learned about Bitcoin. They felt the information was transparent and they could leverage the community outside of mainstream media.
- Most community-led niche asset classes are driven by retail investors rather than institutions. Once the asset class is accepted by a high enough number of market participants, a new capital market ecosystem is being created. The growth of Bitcoin as an asset class was somewhat faster than other alternative stores of value (e.g. watches) simply because it was entirely digital and that it was completely fungible. The latter implying that it could be traded via order books.
- Users need to be able to buy and sell the new asset. For Bitcoin, MtGox was a milestone for user adoption. Once the user adoption grows beyond the believer phase, the converts will push to build an entire capital markets ranging from pre-trade (News, Pricing, Data), execution (Buying/selling) and post-trade (Custody) as well as to ensure regulatory clarity.
Bitcoin and crypto assets are just another example of community-led niche asset class. The next capital market asset growth will be driven by consumer investing in luxury and art brands. Limited-edition sneakers, vintage watches or art pieces are non-fungible stores of value items. The value derives not only from the utility but from a combination of brand, features, lindy effect / history, features (e.g. gold) and government / brand backing (e.g. Switzerland or Louis Vuitton).
We are at an early stage of the luxury and art brands investing. Unlike with Bitcoin, the luxury and art assets are not fungible. This means that the transaction cannot happen on order books and require over the counter agents to ensure the authenticity of the items. The growth of these new markets will need two main developments:
- The growth of online secondary marketplaces for luxury store of value items
- The democratisation of fractional investing
Below we are going into more detail on each of these trends as well as highlighting some companies to watch.
1. The growth of online secondary marketplaces for luxury store of value items
a. Online marketplaces for luxury store of value items
When Net-a-porter launched back in 2000, most people thought it was a crazy idea to imagine that people would buy luxury items on the internet. Eighteen years later, Yoox Net-a-Porter was acquired by Richemont for $3.3bn and twenty years later Farfetch is now trading at a $3.6bn market cap.
This was the first phase of the luxury consumer shift. Users are now routinely buying luxury items on the primary market via vetted marketplaces. Luxury brands have also embraced this new trend and are partnering or launching their own channels.
The second phase is a growth of online secondary marketplaces for luxury items. The primary market is still much bigger than the secondary market but it is growing at a lesser rate of 3% vs 12% (source BCG). Consumers are attracted to the secondary market for many reasons ranging from perceived better price-quality ratio or sourcing limited edition items.
Online platforms ensure a higher level of transparency both in terms of price and authenticity. They also remove the geography barriers for consumers — You don’t have to live in NYC to buy a Supreme hat. Online marketplaces are the main pillar for the growth of secondary luxury items representing about 80% of pre-owned luxury items transactions. A wide range of marketplaces have appeared for secondary luxury items such as Vestiaire Collective to more fast fashion like Depop.
Gone are the days when consumers would only buy sneakers online. Today, consumers are purchasing high value items like handbags and watches.
b. Luxury items seen as store of value items
“Second-hand luxury is rapidly becoming mainstream,” Willersdorf says. “And it is not just the lower price that attracts these true-luxury consumers. It is often the only way they can buy scarce, limited-edition, special sold-out collaborations missed the first time or vintage items.” — BCG report 2019
Younger demographics are taking into consideration the resale value of the items they purchase. They want to invest in items that do not lose too much value over time. Consumers also want to buy less and have the desire to be responsible consumers. This is something that older demographics has not much considered.
The store of value aspect for consumers is something relatively new and is affecting a broad range of items from jewellery, watch and sneakers. An interesting example is the sneaker markets
- Hypebeast, highsnobiety and Facebook Groups are the equivalent of Bitcointalk. Users use these platforms to have a curated list of news and to exchange ideas and views on their favourite sneakers or brands. These forums were very important in fostering online communities.
- Over time, the trading moved away from forums like hypebeast/trade to exchanges focused on sneakers such as Goat. The recent acquisition of Stadium Goods by Farfetch for $250m reinforced the importance of this new niche asset class. Today the sneaker market is (only) worth c.$1bn but is growing faster than the primary market.
“Luxury streetwear is a significant part of our business,” “For many years now, we have had the largest collection of Off-White, for example, on the internet … What we did not have was the resale, secondary market. It was clear this was an interesting opportunity.” — CEO of Farfetch
The next phase will be exchanges offering a wider range of community-led niche asset classes. Some of the largest and fastest-growing consumer-facing marketplace startups and private companies in the world include Poshmark (Fashion), StockX (Streetwear), Goat (Streetwear) or ThredUp (Fashion) as seen in the recent A16Z landscape.
StockX is a great example. It is making easy to trade streetwear, trading cards, collectibles, designer handbags and other luxury items. It was recently valued at $1bn and has 5m+ users on its platform and it has a broad asset offering beyond just sneakers. Once platforms have on-boarded users they will focus on offering a wide variety of niche assets to become the place for any secondary transactions in a specific verticals. Another example is Chrono24 that has completely master the secondary watch market. I wrote a longer deep dive here.
We are still at early stage of this capital market growth. Luxury item seen as store of value is a global trend and there will be a rise of exchanges and brokers. Once this appear, there will be a boom of pre-trade companies ranging from news, pricing data and other tools. In the medium term, you can imagine users being able to use the service of prime brokerage for their sneakers. Users could borrow fiat against their latest Jordan. This was actually done earlier by online pawn shops like Borro but the lack of liquidity and the size of the market were challenges for mass adoption.
2. The democratisation of fractional investing for any asset class
a. Fractional stock investing
A new generation of investors bought their first Bitcoin before their first stock. They are now asking incumbents and Fintechs for the same features that they used with crypto assets.
On December 12th, 2019, Robinhood announced Fractional Shares. That feature allows investors to invest in stocks and ETFs with as little as $1 — regardless of the price tag. This is a great way to attract first-time investors that may not have the means to invest in certain stocks.
Robinhood is not the only one as legacy brokers such as Fidelity or Charles Schwab and Fintech companies such as Stash or Cash App (Square) are also adopting this feature. Over the past 12 months, Fractional investing has become a common feature.
b. Fractional everything investing
In Finance, it is common knowledge that some of the best investments happen in niche markets where access is a differentiated asset. The collectible car market has been one of the best market to invest. However, the high barrier at entry such as the high minimum investment size, high custody cost and lack of transparency were challenges for broader adoption.
The democratization of assets has already happen in legacy sectors such as real estate with the rise of REIT or crowdfunding private equity platforms like Moonfare in Germany.The real asset space is broadening and include luxury goods such as collectible trading cards, or vintage watch.
The move to fractional trading transform non-fungible asset to fungible assets that can be traded via order book based transactions. This is one of the biggest breakthrough in the consumer investing world. Even though there is still a need for over the counter agents to ensure authenticity of the items; trading can finally happen for niche & illiquid assets at scale.
Some companies like Rally are leveraging fractional investment in alternative assets such as vintage cars among others. Rally is more than an exchange as its team also vet, acquire, insure and maintain as well as custody the assets. Though having access is definitely an interesting a step forward users cannot benefit from their investment. This is where Otis is I think one of the most interesting company in the space.
Otis is a curated marketplace for alternative assets with a focus on the Millennial streetwear pop culture such as Kaws, Supreme or Jordan among others. The platform works with a broker dealer to offer share in high-quality assets. Users receive weekly drops and can invest as little as $25. Items are then displayed in public spaces all over the world. This approach to combine alternative assets, fractional investing and utility is truly exciting and something that was not done before. The idea of of fractional investing in collectibles is very interesting and powerful. It speaks to Millennials and is making it easier than ever to invest in assets they understand and even use.
There will be more marketplaces leveraging fractional investing. As Fred Wilson mentioned, this new business model as ‘crypto adjacent’. Today, most crypto networks are too nascent to be used at scale but in the future one could imagine owning a token representing a share of a pair of Air Jordans and using smart contract to have a loans in USDC or sending this token for the birthday to one of your friend. Another idea could be to bundle these fractional shares into investment vehicle etc…
