Reducing Private Market Friction with Ryan Eisenman

[00:00:30] Doug Heikkinen: Let's start with what was the original spark behind Arch? What gap did you see in how RIAs are managing their alternative investments, and what convinced you to build this solution?

[00:00:42] Ryan Eisenman: Yeah, great question. So, I worked for an investment advisory firm, this was during college, and saw a lot of how, advisors function, clients function, and had a few other related experiences. And then in 2017 kept just coming back to this idea of, there are a lot of things that are painful for advisors, and there are a lot of things that are painful for clients. And maybe the most painful thing is managing private market investments.

So for clients that invest in real estate, private equity, private credit, venture, hedge funds, anything that is, by definition alternative. So not in a brokerage account. You have all the pain of getting into the investment, the sub docs, the KYC and AML, and then all the pain of managing that investment.

We did a study last year and found that it's about 5,500 clicks over the 10 year life of a private equity firm to manage that investment. And a lot of those clicks are spent navigating various investor portals. Every fund reports through a different platform and within a different format. So it's kind of like an, "if you know, you know." If you have this problem, you know that it is really painful to manage the K-1s, the capital calls, the information coming off of private market investments.

So in 2017, pitched this idea to a venture capitalist. At the time we were calling it E-Trade for private markets. It's like there should be the Robin Hood, Schwab, Fidelity equivalent of one place to manage my investments that makes it easy to report on and understand and manage these investments.

Didn't exist, still really doesn't, and we're building a lot of that future. The investor lit up, he was like, "Yes. I personally have dozens and dozens of private market investments and this is really painful for me, my advisor, and my accountant. If you want to build this, you should meet these two engineers." So from a series of a few coffee meetings with this investor, met my two co-founders who are MIT engineers.

He decided to fund the project with the three of us, and we were in business with an initial set of a couple beta clients as Well

[00:02:40] Doug Heikkinen: As we know, private markets are becoming a bigger part of RIA portfolios. So what are you finding is driving this increased interest and why are these investments still so operationally complex to manage?

[00:02:54] Ryan Eisenman: Yeah. Well if you think about this idea of democratization, it's like what do people want to be democratized? It's like people want to invest like the most sophisticated investors in the world. So like Yale University or Cambridge Associates and what they've done to proliferate alts. I think there's this general notion of private markets have higher returns and potentially more interesting opportunities.

You can invest in Anthropic and OpenAI and SpaceX and some of these companies and projects that you're not able to invest in, in the public markets yet. the number of public companies has been cut almost in half in the last 30 years. So a lot of the interesting investment opportunities are in private markets.

And so if you are a client or an investment advisor and you want to bring these opportunities to your clients, you need to figure out how to do so. And so there's this effort of getting into private markets, but then it comes with a lot of pain that we look to solve for those that do invest in private markets.

[00:03:50] Doug Heikkinen: You've said that what should be a strategic advantage often becomes a drag on efficiency. Where do you see the most of that friction coming from? Technology, data or maybe process?

[00:04:04] Ryan Eisenman: Yeah, because if you're trying to get the, maybe it's like an extra 200 or 250 basis points of investing in private markets, that's a great advantage. If you're an advisor and you can provide these type of opportunities to your clients, you have a better chance of winning the next marginal client that wants those opportunities and wants to invest in a sophisticated way or that has those types of investments.

And so it's great to be able to offer private market investments, but kind of they carry with them all the work around payments and capital calls and tracking down tax documents. And basically because these assets aren't, for the most part, managed via brokerage accounts, even if they are in brokerage accounts, oftentimes the data isn't good enough to report on.

So it carries with it a lot of pain. So we help advisors essentially be able to access alternative investments across any source. They can source their own investments, they can use some of the feeder funds, they can get them through different banking relationships. If you know Goldman Sachs most recently is like starting to offer more alts to their clients that custody with them, to advisor clients. So there's a lot of ways to buy investments. We help clean up the mess of wherever you buy the investment, even if your clients come with dozens of their own investments, we can make that a much easier experience so it doesn't require you to have to hire lots of people in order to manage these types of products, and create your own processes around them.

[00:05:28] Doug Heikkinen: As we know, many RIAs still rely on spreadsheets and PDFs to track private investments. What are some of the examples of manual workflows Arch helps eliminate, and what kind of time savings does this obviously create?

[00:05:43] Ryan Eisenman: I mean, the first is just like logging into portals. So what we find that most firms we're talking to or doing is they have some kind of shared inbox, all the updates from their client's private equity or private markets positions go into that inbox, and then someone needs to go in and see, "Oh, okay, we got a capital call. Let's go log into the portal, pull down the document, make sure we're setting this up for payment." But then each document, it's not just getting the documents outta the portal. Each document has a workflow. So the capital call notice needs to be verified that there's no fraud in the notice. So we now automate that for folks.

Then it needs to be set up for payment. We're starting to automate that piece. So it's taking every piece of, when a private equity firm, let's just use them as the example, sends any kind of notice to their investors, and often through their advisors, there's some kind of action that needs to be taken.

And so we can structure those notices and those actions so that information isn't missed, payments aren't missed, distributions aren't missed, and then you have really clean data that can be used for billing and reporting and other key functions that are critical for the advisory firm.

[00:06:48] Doug Heikkinen: Automation is a big theme in your work.

How close are we to a one click experience for managing the operational side of private markets?

[00:06:57] Ryan Eisenman: We're about 84% of the way there. Meaning when you look at that 5,500 clicks that it takes to management position, or a single fund, we've automated about 84% of those clicks for our advisor clients.

So today they're still doing their own capital calls and they're still doing their own sub-docs. But those are two of the biggest kind of sources of clicks that we're actively working on as a team, of how we can bring solutions for those painful parts of the client and advisor's workflows as it relates to subscribing to investments or managing investments.

So our focus as a company is, let's go get that last 16% and automate this and turn it into a true one click experience.

[00:07:37] Doug Heikkinen: Love the 84%. Data from private managers is often unstructured and delayed. How does Arch use AI and machine learning to turn that messy information into insights Advisors can act on.

[00:07:50] Ryan Eisenman: Yeah, and we're going even beyond the information that people traditionally focus on of, I would like to structure capital call notices, account statements, distribution notices, things that have numbers in them. So one of those is like the financial statement. So we will help our clients understand how much Stripe or SpaceX do you own through your funds.

So if you own 1% of the fund and the fund has a hundred thousand dollars of SpaceX, then you have a thousand dollars of SpaceX. So that's useful for folks. But then we're going even beyond that, of using AI tools and AI to structure unstructured information. So it's what was discussed in quarterly commentary.

We just introduced the ability to talk to a document, which sounds crazy, but you can ask the document key questions about it, or summarize it in different ways. But we have an out of the box summary where every investor letter that someone receives is automatically summarized and emailed to the client or the advisor or whoever wants access to it, so you can know what's happening with your managers. So we're essentially kind of closing this loop of, a lot of information is being sent, but how do you use this data and use AI to structure that information, contextualize it so you can actually understand how your investments are doing.

That hopefully should inform the, "what's the next investment that I should make" part of the equation. And when you get to that investment evaluation process, we have another AI tool around automatically extracting information from decks, docs, LPAs, and PPMs to power the investment research and investment evaluation phase of investing.

So actually to help with some of the pre-investment workflow as well.

[00:09:31] Doug Heikkinen: Increased transparency and look through visibility sound great in theory. What does that look like in practice for an advisory using Arch?

[00:09:40] Ryan Eisenman: Yeah, in practice there's a lot of decisions that people need to make. So it's giving the advisor tools to be able to structure those decisions and understand what's happening with their client's investments in the same way that if you log into Schwab, there's Morningstar research.

We're starting to give folks research alongside their investments, both buying third party data and creating our own proprietary insights so you can understand, okay, if I own Stripe, here's what Stripe is. Here's how many rounds they've done. Here's where the latest round was. Or if I have a manager, what do I know about that manager?

Where are they based? Does that help me make decisions? What asset classes are they in? That's a big part of giving our advisors tools, but also helping them basically cram for the test. So if an advisor is going to meet with their client, they can use Arch to know, okay, What do I need to know about their private market investments?

I can quickly read through the AI summaries and see some quick charts and graphs of their performance and see some of the biggest cash flows and see, oh, what's their total unfunded commitment across all their investments? So things that help power that conversation. Because we want to essentially give advisors tools to better support their clients, but oftentimes advisors are using Arch as a sales tool for new clients, to be able to like say, "Hey, you have this box of rocks of different alternative investments you've already made. We can give you Arch, and it'll make your life easier, but also give you and us better insights on your portfolio so we can make good decisions.

[00:11:08] Doug Heikkinen: Private markets are attracting more attention from regulators and investors alike. How does better data and automation help RIAs mitigate risk and improve compliance?

[00:11:18] Ryan Eisenman: Yeah, I mean, one thing is during the investment research process, we, part of that tool is the ability to track your diligence process. So if a regulator ever comes knocking, you can say, okay, here's exactly what we did to evaluate this investment.

So it becomes a critical compliance tool as well. And we can help with some of the downstream compliance needs as well. But the whole reason that a lot of these regulatory frameworks exist is to protect clients from bad investments, bad actors, and help them make good decisions. So that's a big part of why we're doing what we're doing, is to uplevel the ability to make good decisions by actually understanding your data and structuring your data in a way that makes it make sense.

So if today we pull information from tens of thousands of different firms and funds and lots of different formats between those firms. We give our clients and their advisors this unified view of all that data so they can really have an apples to apples comparison on how are their managers performing and who is underperforming versus overperforming.

So it's helping people really filter through that noise to create good investments.

[00:12:29] Doug Heikkinen: Last one for you, Ryan. Looking ahead, what's your vision for how private markets will fit into the next generation of wealth management platforms and client experiences?

[00:12:41] Ryan Eisenman: We think they're a critical part of the platforms and experience of investing, especially for high net worth clients and folks that are looking for, maybe to trade off a little bit of liquidity for higher returns, and to get a bit more diversification.

And so we think it's a really critical tool, but it's one that should be simplified. And so that's our focus of, reduce the manual work of investing in private markets and give folks better insights and the ability to make better decisions.

[00:13:12] Doug Heikkinen: Ryan, congratulations on having a vision and seeing it through and all the great work you're doing.

It's been a pleasure having you on.

[00:13:21] Ryan Eisenman: Doug, great to chat with you. Thanks so much for the time and look forward to chatting more soon.

[00:13:24] Doug Heikkinen: To learn more about Arch, please visit arch.co. That's arch.co. For our producer Tory Miller, I am Doug Heikkinen. Thank you so much for listening.