"Trillions, I Like That": A Q&A with Alto Solutions' Eric Satz
Alto has created a platform for alternative investing using IRAs.
Number of the Week: $7.4 billion (explanation below)
"Trillions, I Like That": A Q&A with Alto Solutions' Eric Satz
Eric Satz likes really big numbers—think markets that already involve trillions of dollars and are in desperate need of transformation—and solving complex problems with technology, particularly in the world of finance. The former investment banker-turned-serial entrepreneur did stints at Donaldson, Lufkin & Jenrette, UBS and Credit Suisse First Boston before cofounding Currenex, the first online global foreign currency trading platform originally launched in 1999 as fxtrades.com and acquired in 2007 by State Street for $564 million, reportedly returning more than 10x invested capital. It was Currenex and the vast foreign exchange market the trading platform penetrated that whet Satz’s appetite to tackle other financial markets begging to be reimagined, providing users with easy access, fast transaction processing and, most important, the ability to open up once-walled off markets to a larger pool of customers. His aggregation of financial industry and entrepreneurial experience is what led to the 2018 launch of Nashville-based Alto Solutions, a self-directed individual retirement account (SDIRA) custodian and online platform for accredited and non-accredited investors to make investments in alternative assets using their retirement funds.
Trading life in New York and San Francisco for Nashville, Satz made professional stops along the way before starting Alto. He cofounded Plumgood Food, a now-defunct online grocery store and home delivery business, and became a partner in Tennessee Community Ventures, a seed- and early-stage investment fund. With Alto, Satz believes he can help unlock significant wealth creation for individual investors by giving them previously unavailable access to alternative assets, which have the potential to generate far greater returns than traditional assets, and the ability to use their IRAs to increase portfolio diversification.
Collectively, the Alto platform includes Alto IRA, Alto CryptoIRA and the newly debuted Alto Marketplace, a portal for accredited investors to access “curated” private deals that is a major component of the company’s growth initiatives. While Alto IRA and Alto CryptoIRA serve individual accredited and non-accredited investors, some specific offerings are restricted to accredited-only investors; Marketplace is presently only available to accredited investors and doesn’t require the use of retirement money. (Accredited investors have a net worth greater than $1 million, excluding the value of their primary residence, or an income of more than $200,000 annually, or $300,000 combined income with a spouse.) The U.S. Census Bureau estimates that the top 5% of American households had incomes of $295,000 or more, while 12% of households earn more than $200,000 annually, according to its most recent income report. Even more, real median net worth for U.S. families surged 37 percent, and real mean net worth increased 23 percent between 2019 and 2022, according to the Federal Reserve’s 2023 Survey of Consumer Finances.
If Satz’s penchant for serving big markets with trillions of dollars is any indication, he’s picked a doozy with Alto—two, actually. First, Americans had $13 trillion in assets in IRAs at the end of the second quarter 2023, up nearly 4% from the end of the first quarter. Second, the global alternative assets market is projected to hit $24.5 trillion by 2028, with a forecasted annualized growth rate of 8.4% between 2022 and 2028, according to Preqin’s “Future of Alternatives 2028” report. While that projected growth rate is down from 12.3% for the 2016-2022 period, it is still notable growth given macro factors that are expected to put downward pressure on some alternative asset classes such as venture capital, real estate and hedge funds.
Alto’s investors clearly agree: The Series B startup has raised more than $70 million in funding from Advance Venture Partners, Coinbase Ventures, Visary Capital, Third Prime and Acrew Capital, among others.
The Alto platform, which has a simplified, low-cost account and investment fee structure, currently gives investors access to alternatives including venture capital, private equity, cryptocurrencies, real estate, farmland, art and collectibles, fine wine, and private debt. Hedge funds will likely make their appearance sometime in 2024. (For what it’s worth, Satz doesn’t consider crypto “alternative” anymore. More on that later.)
FIN contributing writer Holly Sraeel recently interviewed Satz on Alto, the company’s growth initiatives and why giving more individual investors the ability to use their IRAs to invest in alternative assets is an underutilized means of portfolio diversification with the potential to realize once-unattainable outsize gains. The transcript has been edited for clarity and length.
FIN: Given your diverse background and the various markets in which you’ve been active, why launch Alto Solutions—what was the major motivation for you?
Satz: There was a lightbulb moment for me when I was getting ready to make an investment in a portfolio company that the venture capital firm was involved with and in that same timeframe, a statement showed up from my IRA provider. I don't often open my mail, but for some reason, I did and saw that I had this money that I just wasn't paying attention to and that I can't touch until I retire. The investments that I'm making in private companies are long-term investments. I thought, “I ought to use tax-advantaged money to make the investment. I want to use my retirement money.” The only real question was whether that was legal. I didn't know if you could do that. …I'd been in financial services at this point 16-17 years, and I had never heard of investing your retirement money in a private company. So, I did what so many people do today when they have a question: I went to Google and typed in “invest retirement money in a private company.” It turned out that you could do it, but the problem was actually getting it done. Executing was super hard, really confusing, incredibly time-consuming and overly expensive.
I did it a couple more times to see whether I was the problem, or it was a systemic issue. I concluded it was a systemic issue, but that made me question whether or not I should put the effort in to solve this problem. I did some market research and found that, at the time—this would have been like 2013-14— that there was $24 trillion or so dollars sitting in retirement accounts, with less than 2% invested in alternative assets. But if you compare that benchmark to what the ultra-high-net-worth or even just high-net-worth investor did with alternatives, and especially institutional investors, their portfolios were going to be anywhere from 20% to 80% of alternatives. I thought I knew the reason why we had that delta: to me, it was [because] it took too long, it was too confusing and too complicated for most people. And certainly, it was too expensive. Who wants to spend that kind of time? My first investment took 10 weeks in a non-IRA setting. The question was could you do it in an IRA setting and have it take 10 minutes? I thought if we could do for alternative IRA investing what TurboTax did for self-filing, then we can build a really big business and help a whole lot of people.
I thought if we could do for alternative IRA investing what TurboTax did for self-filing, then we can build a really big business and help a whole lot of people.
FIN: It’s interesting and powerful that you use TurboTax as a metaphor. Let’s talk about the necessity of access: non-ultra-high-net-worth investors don’t have the investment connections or networks, and they also don't have the technological wherewithal. Can you give me some detail on how Alto is giving more people greater access on these two fronts?
Satz: Yes, and I would say there's a third leg to the stool—the expense of investing. …Most people don't have the required network to get access to the best private companies that are raising money or even the best private funds that are raising money and get an allocation to participate with the best private equity fund managers or the best venture capital fund managers in the world. Based on my background and experience in New York for seven years and San Francisco for five years, during this period I was in banking, this new thing called the internet sector [emerged]. I had the good fortune of meeting a lot of people and being aware of what was going on, what the best firms were, and so when I eventually started Alto, we had the opportunity to plug into that network. It used to be that you still had to bring your own deal to Alto. Now, we’ve gotten our broker-dealer license and with the launch of Alto Marketplace six weeks or so ago, instead [investors] can find a deal or find some of the best fund managers available to invest with, whether it's farmland or early-stage technology, venture capital, or artificial intelligence, for example. We’re helping to solve that access so that many otherwise disadvantaged investors don’t have that problem. It really comes down to convenience…If a company is in the final week of closing a deal, it’s not going to wait for one individual’s IRA check. It needs to be fast, seamless and intuitive. And it needs to not be a headache. …As the leader of a private company who has raised a bunch of money, as well as an investor in private companies, I had a good idea of what it was we were solving and what the solutions that were required would look like. The third leg is just the expense of investing.
When I was making my first investments in this industry—what was then referred to as a self-directed IRA custodian—they would charge an arm and a leg because they could and because they would only serve 10,000, maybe 20,000 customers, the biggest customers. We want to serve 10 million or 20 million customers, which means we had to build a technology platform that can scale to support that kind of mass. It also means a lower, more affordable price point so the average investor can participate. Before, the average investor couldn't participate because they would get priced out.
FIN: Let’s talk numbers. What were Alto’s full-year revenues for 2022?
Satz: We don't disclose that.
FIN: Okay, so let’s do it this way then: give me a sense of year-over-year revenue growth between 2021 and 2022, or 2022 and projected 2023 revenue growth in percentage terms?
Satz: Sure, I'm happy to do it like that. So, from 2020 to 2021, our growth was like 15 times—1,500% growth. From 2021 to 2022, it was like 20% growth. Projection for full-year 2023 is going to be like 16% growth.
FIN: Are you pleased with these growth numbers?
Satz: I like 1,500% growth better. But I'm glad to not be going in the opposite direction.
FIN: By some estimates, the alternative assets market is projected to hit $14 trillion by 2023 and $24.5 trillion by 2028. What factors do you see as major drivers of growth in alternatives?
Satz: There are a couple of things. We've seen what I describe as the consolidation of the public markets, meaning we are—versus the number of public companies at its height—maybe at 60% of that number today. Then most public company investing happens in a passive fashion—ETFs, mutual funds, index funds. And most of those funds are comprised of a subset of the same 400 companies that drive the market. So, give or take, only 5% of all the public companies account for all the returns in the market. …It's kind of impossible to beat the market if all you're doing is investing in mutual funds, ETFs and index funds because they all resemble the market. And when interest rates are at zero, the idea of investing 40% of your portfolio in fixed income was a joke, right? The 60/40 paradigm died. Now, people say the 60/40 portfolio is back because we have interest rates. It's not that; let’s be clear, this 0% [interest rate] was the outlier. Are we too high today? Probably, but we're going to be here for a little while. The thing is, nothing's moving as we used to expect it to move in terms of prices and portfolio performance, so what has been redefined is what 60/40 means. People are still talking about 60% equity and 40% debt or fixed income, but they expect the 60% of equity to be comprised of public and private opportunities and the same thing on the debt side. So, you have the financial advisor community getting up to speed on a very steep learning curve to understand how to get access to alternative assets, and how to help their clients understand the importance of alternative assets in a truly diversified and balanced portfolio. Those things are going to continue to align and push demand for alternative assets up, so I like where we're sitting in that ecosystem.
FIN: Let’s delve into the various types of alternative assets and what offerings Alto currently has on the platform. Here goes—venture capital and private equity?
Satz: Yes.
FIN: Hedge funds?
Satz: Not currently—maybe.
FIN: Maybe as in within the next 12 to 18 months?
Satz: I would say [hedge funds] before the end of 2024.
FIN: Obviously cryptocurrencies, given Alto CryptoIRA. Can we pause here for just for a minute and talk about the Coinbase partnership announced in July? Why is this partnership important?
Satz: Coinbase is important because they're the third largest investor on my cap table. They're the highest quality name in crypto.
FIN: Another crypto question: Alto works with accredited and non-accredited investors. Given that non-accredited investors make up a majority of investors in America, do you think the recent volatility in the crypto market and some of the high-profile fraud that’s been committed and intensely covered—Sam Bankman-Fried and FTX, for example—will have any chilling effect on more investors getting into crypto as an alternative asset class?
Satz: The whole FTX fiasco is incredibly unfortunate for the industry but was probably necessary. First of all, I want to separate crypto from alternative assets. A traditional alternative asset is illiquid, and your capital is going to be tied up for some undetermined period. Crypto looks like public markets but is even more liquid. It changes. It trades 24/7. And as long as you have your own wallet and keys, you can trade on any number of different exchanges across the world, at any time that suits you. The thing that was alternative about it for us was the fact that no traditional broker-dealers would touch it or allow you to invest in it. The same way—by the way—that traditional broker-dealers wouldn't allow you at one point in time to invest in derivatives.
What has thrown a wet blanket on the crypto industry was a number of self-inflicted wounds. FTX is just one; Celsius, BlockFi and Genesis are others. If it looks too good to be true, it probably is. There really is no such thing as free money. When interest rates are zero and people are promising you a 20% yield, you ought to ask why. We saw the house of cards come tumbling down. If you're asking me what I think will happen going forward, the interesting thing is that no one's debating the value of blockchain in business, which will continue to develop. The other thing, when we look back, that we'll find to be true is that Bitcoin is not going away. …Bitcoin is here to stay and will ultimately take on some form of store of value. Ethereum and Ether will continue to exist, and it's probably the best blockchain for contracts. There will be a handful of other crypto assets that survive the Gensler onslaught.
FIN: One other question before we move on. If you don't see crypto as an alternative asset per se, why Alto CryptoIRA?
Satz: The reason we separated Alto CryptoIRA accounts and Alto IRA accounts on the back end is because we got into the business at a time when we didn't know what the SEC or IRS were going to say about having retirement dollars in crypto assets. So out of an abundance of caution, we didn't want to create a scenario where someone could have disqualified their entire IRA account because they put crypto in it. But that ship has sailed, and those assets are good to sit in IRA accounts now.
FIN: Let's talk about other alternatives that can be accessed via the Alto platform. Real estate, including physical properties and property-based securities?
Satz: Yes, but what it doesn’t allow is using your IRA to buy a single property. That we don't do—that's incredibly cumbersome.
FIN: I’m curious about additional risk exposures over the long term for investors with alternatives like farmland given the intensity of climate change. Any thoughts on this?
Satz: This is why you invest in funds with GPs who take all this stuff into account. We're not an advisor. We're an administrator that helps investors execute. I don't think it's any more advisable to go buy a farm than it is to go invest in just one early-stage private company and not anything more—the odds are against you. It’s all about diversification.
FIN: So, to that end, can Alto’s investors also access arts and collectibles offerings?
Satz: Yes, if you're buying an ownership interest in an entity that owns those things.
FIN: You’re probably going to give me the same answer as on farmland, but do you see a potential impact of artificial intelligence on the value of future artworks?
Satz: I don’t know that I'm smart enough in the art world to say. I can tell you that I don't understand the value of whatever those monkeys are.
FIN: Yes to fine wine, correct?
Satz: Yes.
FIN: Alto does not have infrastructure and utilities offerings. Am I wrong about that?
Satz: No, you’re not—unless someone created an infrastructure fund that you could mess in.
FIN: Is that kind of offering something that investors might be able to access in the future?
Satz: Not sure.
FIN: What about commodities—gold, silver, oil and agricultural products?
Satz: We don't do the metals.
FIN: Private debt? Distressed debt?
Satz: Yeah, all flavors of debt.
FIN: Structured Products?
Satz: Yes.
FIN: What about peer-to-peer lending as an alt?
Satz: One of the things that I would love to see is a new model for peer-to-peer lending. There have to be certain characteristics of borrowers out there where [they] are not going to default—or they're going to spend the rest of their lives figuring out how to pay [it] back. It’s based on some kind of relationship or social circle. Today's rates are beyond most people's ability to borrow; how do you buy a car? How do you buy a house? It's hard.
FIN: You'd like to see a new model for P2P lending emerge because you sense there's a growing market opportunity there?
Satz: I do think there's a market opportunity there.
FIN: What about intellectual property as an alternative asset?
Satz: I know of funds that are out there that do that. I'm not aware of any of them being on Alto. I wouldn't say no, though.
FIN: Your role as a self-directed IRA custodian aside, do you have an opinion on where the greatest alt asset investment growth will come from over the next two to three years?
Satz: You’re going to lose if you think about growth in terms of two or three years. You have to think about it as 10 to 20 years. Those are the bets that you're making in alternative assets, which is why I like doing this with retirement money because this money shouldn't be touched until you retire. …I believe in portfolio diversification; you need to have early-stage bets across time. You need to have later-stage bets across time. You need to have exposure to real estate, artwork, credit and the public markets. You need to have it all.
FIN: One could argue that you could live without exposure to artwork...
Satz: One could, but life would be boring. …If you believe in the power law, and I do, which is that you basically have somewhere between 50 and 100 investments in early-stage companies to achieve outsize returns, then you should be investing in a portfolio of 50 to 100 early-stage companies and hopefully you get a Google or a Facebook or a Snapchat or a Coinbase or an Uber or whatever it is in there. You know, turn $25,000 into $100 million.
FIN: To help investors hit those goals, what are your key growth initiatives for Alto right now?
Satz: It's really just one, which is the ultimate: Marketplace. We're bringing some of the most interesting supply—investment opportunities—into our marketplace and making those opportunities available to investors who otherwise wouldn't get an opportunity to invest. This is like a startup within a startup. We started from scratch, and we just launched our first three deals, including a farmland deal, an early-stage VC deal and an AI fund deal. Those are the first three; we have a great backlog that we're bringing to market. I'm super excited about what's happening here.
FIN: When you say you have a great backlog of deal supply, define great. More than 10? More than 20?
Satz: I don't define great by the number, although there's at least 10, but by the quality of the fund managers that we're bringing to the platform. That's what I'm most excited about. This really is a scenario where, because of the reputation that we built as an IRA custodian working in the alternative asset space, we've been able to form relationships with some of the strongest asset managers in the world, and we're going to make investment opportunities with them available to the average American.
FIN: If I understand it correctly, with Marketplace only accredited investors can access the curated private offerings.
Satz: Yes, but that doesn't mean we aren't trying to help change the regulatory environment so that everyone can participate. I strongly believe it should be.
FIN: What needs to happen from a regulatory point of view to open up these opportunities to non-accredited investors?
Satz: It's really easy, and those who make the laws are really good at complicating shit that shouldn't be complicated. Basically, the law should say the following: Any fund manager can raise up to 20% of retail capital—and retail I define as non-accredited plus accredited—which means that at least 80% of their funds have to come from qualified participants. So, you build in de facto sponsorship because you have 80% of the money coming from “smart money”—qualified participants such as institutional investors, endowments, pension funds, insurance companies, asset managers, ultra-high-net-worth individuals. We raised $80 million of a $100 million fund from those people. They wouldn't give it to us if they didn't think we were good. It means we can take up to $20 million from everybody else.
FIN: Can you compare the magnitude of the experience of founding and building Alto to what you did with Currenex in 1999?
Satz: Well, I wasn't the operator at Currenex, but when I was doing the research for Alto, the thing that was similar was that we were talking about markets in the trillions of dollars instead of billions of dollars. I hadn't seen anything like it since I cofounded Currenex. I was like, “Ah, trillions. I like that. We'll do that.”
FINvestments
🦈Number of the Week: A new report from CB Insights shows that global venture investment in fintech in the third quarter was $7.4 billion. As the chart below shows, this is the lowest level in several years:
🦈FIN has long been curious about Charlie, a neobank aimed at Americans over the age of 62. This week, Charlie announced that it has raised $16 million in Series A funding, and $7 million in debt financing.