How does fractional investing work?

In this topic post we will tell you everything you need to know about what happens in the background, from sourcing & authentication all the way to checking in on your investment returns.

This is all broken down into a five step process:

  1. Sourcing & Authentication

The first step before listing any asset on the KOiA App is sourcing the right assets. Currently, we only source from professional sellers with strong track records and warranties to ensure provenance and authenticity. Where required we also verify with an independent third-party. We have a data-driven approach as to how to source assets, looking at a number of factors such as liquidity, rarity, brand equity and relative value.

  1. Storage

Once we’ve sourced assets we want to acquire, the next step is to store them in an appropriate storage facility. Assets are stored in different facilities, based on their storage requirements.

Wine, for instance, is stored in bonded storage facilities that ensure correct lighting, temperature and humidity. Since there are only a small number of specialist storage providers in this market, it sometimes means that after the wine is acquired, it never leaves the warehouse and simply gets moved to a new section and / or gets put under the new owner’s name. Small high-value items such as watches or trading cards are stored in secure safety deposit boxes. For security reasons, we can’t disclose the exact location of some assets.

  1. Fractionalisation

Another frequently asked question is how the process of fractionalisation actually works. Each asset is acquired and owned by a separate entity and as an investor you invest in the company that owns the asset.

The two main reasons for this fractionalisation method, which include;

  1. the companies that own each asset are separate from Koia, meaning that you as an investor are protected should Koia go bankrupt.

  2. Investing in companies is a tried-and-tested mechanism that is familiar to both consumers as well as regulators and a legally compliant way in which to run the business.

  1. Tracking Performance

After you buy your fraction you will of course want to keep track of its performance. An important thing to note is that alternative assets such as fine wine or watches do not work in exactly the same way as stocks.

For items such as fine wine that get traded frequently, there is a relatively high volume of data available and we can be fairly confident that if an often traded wine was last traded for, say, €11,000 a similar price would be obtained if putting it up for sale today. With very rare items that only get sold via auction, we’d display last sales data but there is no guarantee that the exact same price can be obtained if putting the item up for sale today and it can be either lower or higher. The latest price date would, of course, provide an indication of where the market is going and whether it is trending up or down. We get our data from a variety of sources, such as marketplaces and merchant data and auction houses.

As a rule of thumb, the more unique or rare the item is the less accurate the estimated value will be.

  1. Investment Returns

There are two ways in which you as an investor on our platform can generate returns. The first is when the asset gets sold as a whole to a new buyer. Given that most alternative assets are long-term investments, we’d expect that in most cases this would only happen after a number of years. Offers from potential buyers would be put up for a vote and users that invest in the item can have their say in whether to accept or reject the offer.

In addition, we will be adding a secondary market to the KOiA App early next year, where you would be able to buy and sell fractions from other users, without having to wait until the asset is sold.