Melting Point* was founded by Raphael Haas in 2014 after spending more than a decade as the Head of the Financial Services practice at a boutique investment bank, where he focused on alternative asset management M&A. The genesis of Raphael’s idea for Melting Point was his desire to bring transparency and fairness in secondary market transactions to the wealth management channels. The idea occurred to him after working on one M&A transaction in particular – where investors in a fund, which had been distributed via a wirehouse, were left orphaned during the 2008 financial crisis. Up until that point, the secondary market for alternatives had principally been the dominion of large institutional buyers and sellers.
We sat down with him to find out more about Melting Point and its growth over the last 6 years.
Tell us a little about your company and how you partner with Addepar/Acervus Securities…
Melting Point Solutions is a secondary market intermediary. We provide auction-based liquidity solutions to owners and managers of alternative investments – private equity, venture capital, real asset, illiquid hedge – both funds and directs. Melting Point has a success-only fee model where we are aligned with a seller to obtain the highest price possible. Melting Point partners with Addepar/Acervus in two ways:
- Acervus clients can hire Melting Point directly to manage a sales process of an asset or a group of assets.
- Recent Melting Point-managed sales bids are displayed in Marketplace* when the winning bidder has an appetite to buy more of a specific asset. If an Acervus client holds that asset and has an interest in selling, we facilitate the transaction.
In your experience, what are some of the main “use cases” of Melting Point’s services within the wealth management channel?
- Active portfolio management and asset allocation. The liquidity and size of the secondary market are now such that discounts to net asset value (NAV) are smaller than they have ever been. For example, high-quality buyout names tend to trade in the range of low 90% of NAV to a premium to NAV, name dependent. Venture Capital, again fund specific, will trade in the range of 75% of NAV to par. Real estate consistently trades in the low to mid-80s, sometimes 90. Hedge funds are much more situation-specific.
- Wind-up of legacy fund-of-fund vehicles. Many RIA firms utilize managed fund-of-fund vehicles to provide their clients with diversified exposure. These funds are raised (and liquidated) periodically and have certain vintages.
- Life events. For example, death, divorce, etc., may present a need for selling positions.
- Distressed and legacy situations. This is many people’s perception of the main use case for the secondary market in alternatives. It is not the main use case any longer.
- Capital Calls. Investors may have over-allocated to private funds in the expectation that distributions would fund future capital calls. A slower pace of distributions may cause investors to want to sell highly unfunded positions.
How have you seen the secondary market for alternatives evolve?
Since the Global Financial Crisis, the secondary market in alternatives has evolved in such a way that liquidity is no longer an issue. Meaning you can invest in a long-lock fund and if you need to get out you will be able to get out. The growth in the number of secondary funds (and the capital they manage) has been massive over the past decade. In addition, the range of participants has expanded to include foundations, endowments, pensions, sovereigns, insurance companies, family offices.
Investors’ reasons for accessing the secondary market have changed substantially. It used to be for forced sales of distressed assets to predatory buyers at large discounts to the reported NAV. The secondary market now is a tool/solution to be able to add to investments/managers you like that may be closed and to redeem from funds that have long-lock periods.
With the quickly shifting market landscape, what are your observations and reactions to what that means for secondaries in alternative investments?
We expect that both Limited Partners’ and General Partners’ adoption of the secondary market will continue to grow. The benefit for investors is that they can more quickly deploy funds both as buyers and sellers via the secondary market. The benefit for managers is that their long-lock is not as big of an issue in raising AUM given the size of the secondary market and the liquidity being provided.
How do you see secondary market fintech evolving in the next 3-5 years?
At present, full digitization is restricted by confidentiality requirements, manual settlement of a transaction and the fact that sellers often want/need advice from their advisor. We mostly use online auction capabilities when we are required to employ a ‘qualified matching service’ in accordance with the IRS’s ‘publicly traded partnership’ rules.
We believe that the “digitization” of the secondary market in LP interests is inevitable. It is already happening with private company shares and we believe that, in partnership with a firm like Addepar/Acervus, Melting Point will be at the forefront of first digitizing the auction process and, further down the road, making the settlement process more efficient.
For more information about Marketplace and our partnership with Melting Point Solutions, please reach out to email@example.com.
*Marketplace and its brokerage services provided by Acervus Securities, an SEC-registered broker-dealer and member FINRA/SIPC, an Addepar company. Acervus Securities, Inc. is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This article, and any attachments, is not an offer, or solicitation of an offer, to buy or sell any security or other product. The information provided is subject to change without notice.
*Melting Point Solutions offers securities transactions through Kidron Capital Securities LLC, Member FINRA, SIPC.