What a wonderful customer-centric investment world! The Wealthfront – Fundrise dispute.

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It wouldn’t be the first time that Wealthfront defends publicly their view which is opposing another Fintech positioning. We can all understand the motivation of going public against Betterment in the earlier years while aiming for the leading position in the space of standalone Robos 1.0.

What caught my eye last week was the public argument between Wealthfront and Fundrise, a leading real estate crowdfunding platform. The issue at stake was the “optimal” or “customer-centric” way that small investors should gain exposure to the real estate market.

Real estate investing is by no means new and is Not low hanging fruit. It is complex even in a relatively mature market like the US. Public and private investment vehicles to gain exposure to various real estate sectors have been around for a while. What is new is taking advantage of low-cost technology and new business models to improve the UX, increase accessibility and improve the risk/returns.

We have innovations focused on the Data aspect of Real Estate which is an information business.

Others focused on the Speed, the consistency of underwriting and analysis.

Others democratizing the deal flow with more transparency.

More than 200 companies in the US are startups in the digital investment part of the stack. Staring with crowdfunding platforms (Fundrise being one of them) that have taken off after the JOBs act, marketplace lending platforms specializing in real estate (like Sharestates) and eREITs giving exposure to a diversified portfolio of commercial real estate with a very low denomination and cost.

And just recently, companies like StackSource who have created a digital marketplace for commercial real estate lending that connects both “online” and “traditional” lenders.

Circling back to the dispute between Wealthfront, who naturally uses publicly traded REITs in their portfolios, and Fundrise who has launched the eREITs innovation.

eREITs are public but Not-traded structures that offer to small investors (as low as $1000 denominations) exposure to small-cap commercial diversified property portfolios. RealtyMogul has also launched similar structures as Fundrise.

Wealthfront claims that REITs and real estate ETFs offer not only more liquidity and greater diversification but also better returns. The argument is valid and is supported by the usual passive average outperformance versus active real estate portfolio performance.

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Fundrise claims that their business approach is more like a Blackstone and should be evaluated on the basis of opening a market segment that was not accessible before to retail investors and that actually presents low-cost investment opportunities. Fundrise claims that the entry point of the assets they are packaging in eREITs is much lower because of their lower liquidity and their private status. Fundrise believes that there are better opportunities in the less liquid Private commercial sectors and that eventually, they will offer better returns to retail. The example of the recent IPO of Invitation Homes (INVH) shows how expensive the public markets can be. INVH was priced 215% higher in the public markets than in the private markets, according to data from Google Finance (source).

For me, this argument is more about public versus private real estate rather than passive versus active. I see analogies with the other relative illiquid asset space (i.e. loans) which is also creating all sorts of investment vehicles for retail.

The fact is that yield-starved investors of all sizes are “begging” for something juicy and are moving down the liquidity curve. In these conditions, I wouldn’t be surprised if a someone launched a Robo platform for retail with an exclusive focus in private markets (not listed on central exchanges). A contemporary “alternatives” platform (hedge funds or private equity are not alternative any more) that you can create a portfolio with investments with tokens like the YC Combinator idea, eREITs like Fundrise, and marketplace loans like Mintos.

Efi Pylarinou is a Fintech thought-leader, consultant and investor. 

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One comment

  1. Interesting debate. I think in terms of bar bell – passive/low cost at one end and active but without intermediary at other end. In real estate, buy to let has been a classic middle class way to build wealth. And real estate is all about local knowledge so an active individual can beat the professionals if they focus on what they know. It is the bit in between I am dubious about – active/high fees via intermediaries. In that I am in the Wealthfront camp.

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