Client spotlight: Darksquare

In our latest Delio client spotlight, we sat down for a chat with Daniel Harman, co-founder and CEO of Darksquare. After previously working as a Distressed and Special Situations trader at RBS, Dan launched the platform in July 2023 alongside co-founder Alex Whitney with the aim of enabling individual investors to enjoy better access to alternative assets. 

We caught up with Dan to find out more about the business and how they are using Delio’s private markets technology and deal structuring solutions to help investors diversify their investment portfolios through alternative assets that have traditionally been inaccessible to all but the wealthiest individuals and institutions.

Congratulations on the launch, Dan. Tell us a little about Darksquare and what the business is all about.

Darksquare is an alternative investment platform for individual investors in the UK. We’re enabling high net worth and sophisticated investors to deploy capital to alternative assets that have traditionally been restricted to ultra-high net worth investors, hedge funds, family offices and institutional investors.

We’re opening up access to some really interesting opportunities in areas such as wind energy, battery storage, other renewable opportunities, forestry, distressed credit and many more. 

One of Darksquare’s missions is to provide wider access to alternative investments that have traditionally been limited to the ultra-wealthy. Was this a driving force for setting up the business?

Yes, exactly that. My background is in distressed credit and this is where the idea for Darksquare came from. I saw firsthand how hedge funds were buying into distressed bonds and loans and found it frustrating that I, as an individual investor, didn’t have the same access to these products. For bonds you’re looking at a minimum investment of £200,000 and for loans it’s closer to £2m, so they’re just not a feasible option for most individuals. 

The premise of Darksquare came from this frustration. We thought that we shouldn’t limit ourselves to distressed credit only, which is where the broader opportunities in other alternatives came into play. There are some really interesting asset classes that are not correlated to stocks and offer good risk adjusted returns. The problem is that these have traditionally required very high tickets. We tend to think of the platform as offering fractional ownership of these expensive assets and we’re open to promoting any assets as long as they’re non-stock and non-crypto currency related. 

Why do you think that portfolio diversification through alternative assets is so important?

We’re by no means trying to replace stock investing. What we’re saying is that 20-25% of an investor’s portfolio should be deployed to alternative assets and we’d love people to do that through us.

Obviously, portfolio diversification isn’t a new phenomenon – it’s one of the first things you learn when studying investments at university, or even at school. As a lot of people have found out through crypto investing, putting all your eggs in one basket is a fairly easy way to lose your money relatively quickly. What we’re saying is that it’s important to spread your capital across a diverse range of assets in order to reduce risk.

While retail investors can diversify to an extent by investing in different stocks, it makes sense to deploy capital in a range of different asset classes that aren’t linked to the stock markets. All of the investment opportunities we offer have been specifically selected based on our strict risk versus return criteria – we obviously want to offer high returns but we’re also keen to protect investors’ capital in the event of a stock market downturn.

You’re offering access to some very interesting asset classes that you don’t typically see from institutions and marketplaces. Was that a deliberate strategy?

It’s happened fairly organically, to be honest. Our primary focus in selecting deals has been risk adjusted returns and capital preservation, which is why many of our early deals are at the top of the capital structure.

ESG has been an important secondary focus for us. We want to give investors access to investments that can protect their portfolios while also protecting the planet at the same time. A lot of these ESG focussed investments have the potential to generate good returns, particularly against the backdrop of rising energy prices in the UK and Europe. So, we’re ideally aiming to have around 80% of the opportunities listed on Darksquare classified as ‘ESG friendly’ given that they will have a direct link to sustainability goals.

We do feel that there is a lot of greenwashing going on across the industry at the moment. It’s really important that the investments we offer are genuinely ESG friendly, rather than just slapping a green sticker on anything for the sake of it. We’re committed to measuring the impact of these opportunities and I think we’re in a good position to demonstrate how these projects are making a tangible difference.   

You’ve mentioned the importance of risk versus return in selecting opportunities for the platform. This is evidently a key consideration for you. 

Capital preservation is one of the most important pillars of Darksquare, so we will always look favourably at assets with strong downside protection. That’s why many of the opportunities we offer sit towards the top of the capital structure. Ultimately, risk adjusted returns are our primary focus when selecting which opportunities to put in front of investors.  

How have you found working with Delio as you set up the business for full launch?

It’s been massively helpful, to be honest. Before we came across Delio, we were exploring the potential of building the platform in-house but we realised this was likely to cost in excess of £150,000 and would probably take six months to complete, without considering the complexities of outsourcing the engineering and selecting a partner to do the work. 

Working with the Delio team has been a huge help in lots of different ways; being able to draw on the various expertise of people from across the business, your solutions are tried and tested, and you have a heavy focus on regulatory governance which is really important for a new business like us. 

We wanted investors onboarding to the Darksquare platform to have a seamless onboarding experience, while also ensuring that all of the necessary compliance criteria are being fulfilled. This requires a fine balance in designing a process that meets all of the relevant FCA regulations without turning investors off due to overly strenuous form filling. Using Delio’s technology has really streamlined the process and made it much easier for all involved, so we’re really pleased overall.     

What does the future look like for Darksquare over the next 3-5 years?

We’re very clear that we don’t want to be a platform that lists hundreds of assets each year. Instead, we’re looking at offering 10-15 high quality opportunities and we’ll move towards bigger ticket items as we scale. 

Right now, our sweet spot is deals with a total size of £500,000 to £2m. I’d expect that to grow to £3-5m over the next couple of years, and maybe up towards £5-10m further down the line. The advantage of this approach is that we can be very selective with the deals that we offer to investors; we don’t need to chase dealflow just for the sake of it. It’s very important to us that opportunities offered via the platform are of the highest quality. 

This is one of the reasons why our fee model is set up to reward good performance; we charge a 1% cash fee up front to cover some of our overheads, but annual fees are charged as payment in kind so our ongoing fees and financial incentives are completely aligned with our clients’ returns. This means that we only do well if our clients are doing well, which is why we take the quality of the deals on offer so seriously.