Catching Up With: DarcMatter CEO Sang H. Lee

Alternative Investor DarcMatter turns 5 in November of 2019

[Editor’s Note: It has been four years since we profiled Sang H. Lee, CEO at DarcMatter.  He has kindly provided us with an update on exciting developments at the firm.]

DarcMatter has been quite busy, having celebrated its 4th birthday in November 2018. DarcMatter’s alternative investment platform has seen significant growth since its inception. There are currently over 2600 LPs (Institutions, RIAs, Family Offices and HNWIs) from over 62 countries. They are utilizing the platform to access over 150 fund investment opportunities. The FinTech platform has been recognized as the global award winning FinTech platform for alternative investments. Recent accolades include:

• “2018 Startup of the Year” in Banking and Financial Services – The Stevie’s Organization
• “Best Growth Stage Startup” – NextMoney HongKong Global FinTech Finals
• “Top 10 Startup” out of over 2400 participants globally – K-Startup Grand Challenge (South Korean Government Initiative)
• “Best FinTech Solution for Hedge Funds” – HFM Technology Awards
• “Best Innovation for Retail Investors” – FinTech Breakthrough Awards

In addition to the startup’s global accolades, DarcMatter has launched two important initiatives: the DarcMatter Alternatives Conference (DMAC) and “Konstellation,” the company’s blockchain division.

DMAC is ramping up for its 3rd annual conference with the goal to provide South Korean Institutions and LPs with direct access to leading alternative investment firms interested in building relationships in South Korea.  This conference takes place in Seoul with the potential of expanding the conference’s regional footprint.

Konstellation is the newly established blockchain division of the company. It was created to develop and integrate key blockchain solutions to support global financial services.  The blockchain arm is partnering with leading financial institutions to consult and develop solutions that address key inefficiencies throughout day-to-day operations.

[Editor’s Note: Here is our original profile of Lee, published in 2015.]

We recently got to know DarcMatter – a fully transactional platform that offers transparent, institutional-level access to alternative investment opportunities, and the company’s CEO, Sang Lee. Investors can source private investment opportunities in hedge funds, private equity, venture capital, and structured debt opportunities. By using technology and designed feeder funds, DarcMatter can provide a frictionless process for both investors and private issuers while remaining fully compliant with all financial regulations. Here’s what Sang Lee had to share:

1. What inspired you to found DarcMatter? What did you do before that?

DarcMatter is an expansion of an already existing platform, Return on Change. Return on Change offers investors access to startup companies within critical sectors. We learned that startups and angel investors constitute only a minor portion of the private capital marketplace. As our experience and ideas evolved, we discovered that the entire private placement industry’s eventual adoption of product distribution technology presents a massive opportunity. Online investing will naturally evolve to meet the needs of wealth managers, advisors, and accredited investors seeking to directly invest in portfolio-enhancing alternatives, and DarcMatter seeks to be a part of that evolutionary process. Our platform brings transparency to an otherwise opaque marketplace and provides investors with additional ways to access alternative investments.

Prior to DarcMatter, I was an investment banker in the energy field at WestLB and BNP Paribas, with experience in the advisory and execution of more than $10.0 Bn equivalent of energy transactions in North America. During my career, I focused on structuring, credit analysis, documentation and deal execution for complex transactions involving multiple investor groups, institutional investors, and financing products from major investment banks.

2. You were previously an energy investment banker. How have your experiences in banking helped in founding DarcMatter?

As an investment banker, I witnessed firsthand the inefficiencies and closed-off nature of the private capital markets. Moreover, a lack of technological innovations that improve deal sourcing and alleviate these inefficiencies have failed to surface, alienating many potential investors from participating in private opportunities. DarcMatter was a natural response to many of these pain points I directly experienced while working in the industry.

3. Online investing is getting more crowded. What makes DarcMatter different from other online investment platforms working with accredited investors?

There are several firms designed to digitally provide alternative investments to qualified investors.  iCapital provides investors with access to private equity funds only. TrustedInsights is competing for the same customers as DarcMatter, but is more heavily focused on increasing informational and networking efficiencies between issuers and institutional investors. By aggregating individual investments and administering them as a single LP, the DarcMatter model considerably streamlines capital raising logistics and post-closing investor management for issuers while providing investors with institutional-level access to alternative investments.

4. What need or gap in the private investment market is DarcMatter filling?

The need is twofold but it all comes down to better connecting issuers and investors. On the investor side, accredited investors and institutional investors are always looking to source private investment deals. And until now, access to deals was largely dependent on the investors’ network, purchasing power, and connections. On the issuer side, fund managers spend an enormous amount of time reaching out to potential investors. By bringing both investors and issuers online, we’re bridging the gap that has historically existed between the two while enabling greater efficiency. The marketplace has remained opaque for the most part until now, and DarcMatter is trying to bring transparency to the private capital markets.

5. For an accredited investor, what are some of the benefits of investing via DarcMatter?

Individual accredited investors and high-net-worth individuals are increasingly investing in alternative investments to diversify their portfolios. Unfortunately they’re unable to access highly sought-after deals because these offerings have high minimums and are typically restricted to the realm of institutional investors. DarcMatter’s model aggregates and administers individual investments as a single LP, providing retail investors with access to venture capital, private equity, hedge funds, and structured debt opportunities. According to a report by Cerulli Associates, American households owned $33.5 trillion in investable assets at the end of 2013. It is estimated that $1.67 trillion of those investable assets will be allocated to alternatives.

6.Can institutional investors and qualified purchasers make investments on DarcMatter?

Absolutely. We’re working with institutional investors and qualified purchasers such as family offices, wealth managers, pension funds, endowments, and others. These qualified investors have the option of investing directly into a specific fund instead of going through the DarcMatter LP feeder model.

7. Why would private equity, hedge funds, and venture capital be interested in taking investment capital from individual accredited investors?

Hedge funds, private equity, and venture capital funds used to exist primarily for a very small demographic – the ultra-wealthy. Funds are always looking for investors, and the accredited investor market is an untapped source of liquidity for them. Many of these funds raise exorbitant amounts of capital. So while one individual investor’s commitment may not even meet the investment minimum set forth by an issuer, an aggregated sum of multiple commitments can amount to a considerable LP commitment. This is what DarcMatter’s feeder funds are accomplishing – allowing funds to tap into accredited investors. Due to DarcMatter’s feeder fund structure, issuers only have to deal with DarcMatter as the single LP and point of contact.

8. What diligence do you do on a company or fund before allowing it to list on DarcMatter?

Our team performs an in-depth investment analysis of each offering and determines how it fits into any one of our feeder portfolios. We make sure disclosure standards are met by gathering all necessary documentation prior to allowing an offering to list on DarcMatter.

9. What is your stance on alternative investments? Do you think individual accredited investors should participate in risky investments like alternatives versus sticking to traditional investments?

While there is no universal asset allocation strategy that will apply to every investor, incorporating alternatives has become an increasingly prevalent diversification technique among both institutional and accredited investors seeking to enhance the risk-return profiles of their respective portfolios. Since alternatives are non-traditional investments, they do not tend to move in the direction of the stock market and naturally feature low correlations to traditional asset classes. A seemingly diverse portfolio (stocks and bonds) from an asset allocation point of view is not necessarily ideal from a risk diversification perspective. This becomes particularly troublesome during times of economic crisis as we begin to see correlation spikes between traditional assets. When markets become volatile and sharp drawdowns occur, assets that were already correlated can converge to an even greater degree and ultimately compromise the risk diversification abilities of a portfolio.

What we’ve learned from the events of 2008 and 2009 is that conventional diversification strategies are not enough to protect against market volatility. A portfolio that incorporates an asset allocation to alternatives can potentially diversify risk exposures, cushion market volatility, and enhance returns. As alternatives are incorporated, a wider investment opportunity net is cast and thus a balancing effect on a portfolio is achieved.