Alternative investments are having a moment. Its popularity has skyrocketed over the past decade, as the asset class has grown from just over $3 trillion in 2008 to over $10 trillion in 2019. According to data provider Preqin.
Much of this growth has been fueled by institutions, investing at a record pace in alternatives such as crypto, private companies, and real estate. Some wealthy investors have made windfalls investing in alternatives using premium tax accounts, a strategy billionaire Peter Thiel used to grow his Roth individual retirement account from $2,000 to $5 billion in 20 years, tax-free. ProPublica reported last year.
Now, ordinary investors are looking for a slice of these markets, enticed by the potential for huge returns, which are more attractive if they are tax-free.
While investing dollars from a tax-advantaged individual retirement account in alternatives has long been legal, it has remained out of the reach of ordinary retail investors. Veteran investor Eric Satz realized this in 2013 when he first tried to distribute money from his IRA into private companies and met with a reaction from his financial advisor, who was concerned about the potential risks, Satz told TechCrunch in an interview.
After 10 weeks of research and logistical hurdles, Satz was finally able to make his first tax-franchise alternative investment through a self-directed IRA.
“At the end of this 10-week process that seemed to have constantly moving targets in terms of what was needed in order to invest, I wrote to the custodian that I was using a check for the privilege of making this investment they discovered and did all the homework and research,” Satz said.
Frustrated by these complications, Satz attempted to go through the same process using three different Guardians, finding his experience “getting worse each time.” The cumbersome process, according to Satz, explains why less than 2% of $35 trillion in assets Sitting in individual retirement accounts is invested in alternatives. In contrast, most high net worth investors and institutions have much higher allocations to alternatives, ranging from 15 to 80%, Satz said.
Satz said retirement accounts are particularly suitable for making early investments in private companies because of their long tenure and risk-return profile. Using self-driving IRAs to make such investments was costing Satz more than $500 a year in fees, a problem he aimed to solve for others by launching Alto in 2018.
Alto’s self-driving IRA platform provides a simpler and more affordable option for individuals to invest their retirement savings in alternatives, according to the company. The Nashville-based startup provides its users with access to a range of alternatives through its partnerships with more than 70 investment platforms, including AngelList, Grayscale and Masterworks, the company says.
Satz added that Alto hosts nearly 20,000 funded accounts representing nearly $1 billion in assets — and 40% of the accounts are dedicated to holding cryptocurrency.
Alto announced today that it has raised $40 million in Series B funding led by Advance Venture Partners, whose founder and managing partner David T. ibnAle is set to join the company’s board of directors. Also participating in the round were existing investors: Unusual Ventures, Acrew Capital, Alpha Edison, Foundation Capital, Gaingels and Coinbase Ventures. The last time Alto raised $17 million from its Series A was in April 2021.
Satz said the startup plans to use the new funding to grow its team of product and engineering staff from 50 today to 120 by the end of 2022. It also plans to grow its content offerings to help investors educate themselves on alternatives, even though the company is not a registered broker-dealer or investment advisor .
While cryptocurrency is one of the fastest growing areas of interest for Alto users, Satz said he expects demand to grow in other areas, including investing in private companies and art work.
“I think what you will see from us in the first and second quarters is more penetration into the collectibles and collectibles markets. There are just some product innovations that we are coming out with that will make that a lot easier for most people,” Satz said. [also] I think we’ll see some innovation in 2022 in access to money, and more people being able to get involved in investing money.”