(Bloomberg) — When Abdul Al-Asaad was a student at Harvard Business School in 2021, he pitched billionaire investor Bill Ackman on an idea for allowing everyday people to finance investments. Ackman was intrigued — and wound up being Al-Asaad’s first investor.
These days Al-Asaad, 30, has more venture backers. He has a name for his business: Basic Capital. And he has an audacious strategy that involves term financing, leverage and private credit—terminology commonplace on Wall Street but far from what individual investors might expect when it comes to their retirement savings.
Basic Capital’s basic pitch: Its 401(k) and IRA platform offers savers $4 in leverage for every $1 saved. At current interest rates, the cost of that extra money, which sits in a limited liability company created for each account, would be about 6.25%. But, the thinking goes, the startup can find private credit investments from the major players in the industry that yield more like 9%, meaning they will throw off enough cash to cover the borrowing costs and then some. Mix in some traditional stock-market exposure, and—assuming those private credit yields persist and that equities gain in line with historical averages—the startup said savers can expect low double-digit returns.
The general concept of getting financing to plow into investments in the hopes of generating market-beating returns isn’t entirely novel to the retirement space. Some cash-strapped states and cities, like Illinois and Chicago, have issued pension-obligation bonds, betting the assets they buy will gain more than the fixed-rate of their debt.
But offering the option to everyday Americans speaks to the push among the finance industry, which has been squeezed by lower fees and greater competition, to reach individual investors—especially the $12 trillion pool of capital in employer-sponsored workplace plans.
“If you want to buy a house, you take a mortgage. If you want to buy a car, you take a car loan. If you want to go to school, you take a student loan,” Al-Asaad, who previously worked in leveraged finance at Goldman Sachs Group Inc., said in an interview. “Why isn’t there a mechanism for me to finance investments in the market?”
The risk with leverage, of course, is that the market doesn’t go your way. If the stock market swoons for an extended period, or if the companies that borrowed through private credit default or go bankrupt—the industry has been going though a rough patch amid worries that credit quality will decline—an investor would be on the hook to repay the financing out of their own funds. In theory, they could be wiped out entirely. Just as gains compound, so do losses.
“Our investors are long-term holders contributing through retirement accounts, dollar-cost-averaging into diversified, cash-flowing assets,” said Al-Asaad. “We believe the likelihood of long-term underperformance is low, though not zero. This isn’t a risk-free product, and consumers should be wary of anyone promising otherwise.”
The platform comes with fees to account for the complexity. On Basic Capital’s 401(k) platform, plans are charged $5 per employee, as well as a management fee of 0.25% of plan assets. Those who choose to allocate to its product pay an additional 0.5% fund management fee and 5% of the gains on withdrawal. Those in self-directed IRAs pay the same 0.5% fee and 5% of gains, as well as $25 a month.
Basic Capital enters the 401(k) space during a time marked by scrutiny of plan sponsors. Potential red flags in Basic Capital’s product are “the leveraging, various moving parts and relative complexity, potential counterparty risks, transparency issues and the fees,” said Mark Iwry, a former senior adviser to the Treasury Secretary for national retirement and health policy and a nonresident senior fellow at the Brookings Institution.
“Compliance and transparency are core to our mission and critical to building a durable business,” Al-Asaad said. “But too often, these principles have been misused by incumbents to resist innovation and preserve a system in need of change.”
Basic Capital already has savers on its platform. One is Service Professionals, a 100-person firm in Union, New Jersey, that provides electrical, plumbing and HVAC services.
Casey Timorason, the firm’s head of growth, found Basic Capital’s site when researching 401(k)s online. He hopes to use their platform to distinguish Service Professionals in a competitive and shrinking pool for talent. “I’m thinking about how can we offer things to our team that helps them build wealth and not be part of the machine I see in some areas of our industry where people are being worked to the bone,” he said.
An added possible benefit to using Basic Capital’s platform, he said, could be savings in the company match. “We were doing a 4% match, and theoretically we could achieve the same by matching with 1% now,” said Timorason. “And if we kept our 4%, then it would be 16%.” (Virtually no company 401(k) match relies on leverage.)
Al-Asaad, who was born in a Palestinian refugee camp in Syria, at 16 got a scholarship to go to the United World College boarding school in the Netherlands. He was then recruited to Skidmore College, went on to work at Goldman Sachs and attended Harvard Business School on a scholarship.
Since Ackman made the first investment, Basic Capital has picked up some notable venture capital backers. In 2023, its seed round was led by Lux Capital and included venture capital firms BoxGroup, Company Ventures and SV Angel. Henry Kravis, co-executive chairman of KKR & Co., is also an investor through his family office.
“Credit is a tool — it can be used productively or destructively,” Al-Asaad said. “Our mission is to make credit work for people, by giving them the ability to invest for their future.”
To contact the author of this story:
Suzanne Woolley in New York at [email protected]
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