Major public market exchanges such as the NYSE (New York Stock Exchange) Nasdaq, Nikkei, and London Stock Exchange used to dominate the public perception of trading in company stocks and shares.
Significant company flotations through these great institutions – companies ‘going public’ – would make headlines, and fortunes too for a lucky few with access to the markets.
But this used to contrast sharply with the potentially much larger private securities market, which did not have the same level of access to buying and selling shares, despite the USA alone having some 27 million private companies.
It was this lack of private market liquidity – the speed with which investors could buy into and exit with their money – that gave the public markets such an advantage.
This is changing with the advent of Alternative Trading Systems (ATS) specifically created and operating in the private securities market, regulated and monitored by FINRA and the SEC, and other equivalent bodies outside the US.
This has sparked a revolution that is set to grow the private securities market from $7 trillion in 2021 to $30 trillion by 2030 (source: Forbes) and is being driven by the potential to invest in a company that could be the next Apple, Microsoft, or Airbnb before they go public and earlier in its lifecycle.
As shown in this graph, the recent trend has been for companies to stay private longer, denying would-be retail investors the opportunity to build an investment portfolio in exciting private companies or liquidate private securities at a time of the investor’s choosing.
Take SpaceX for instance, which is a private company; it is almost impossible currently to buy or sell shares in such exciting ventures as this, but these newly created secondary trading ATSs potentially enable this to happen just as it does on the public markets.
The years 3-10 are usually the period of a private company’s greatest growth in value, and the graph highlights how investors used to be able to share in those gains at major companies like Apple, Microsoft, and Amazon.
The graph also shows the recent norm where a small number of major, institutional and VC investors harvest most of that growth gain. By the time the likes of Google and Airbnb went public, further potential gains from buying and selling trades were far smaller.
But the rise of the private market – largely through equity crowdfunding – is changing the pattern again. Private companies can potentially fund their expansion across a much wider and flexible investor base, many of whom back a company because they like what it is producing, and what it stands for, as well as the potential profits to be gained when investors decide to sell up their stake.
This last point supports a growing trend, highlighted by a Bloomberg report and a UBS survey, showing that private equity is now the favourite option for wealthy family investors: 85% said they’re likely to invest in early-stage private companies this year – up from 74% in 2021.
The ATS is the key to accessing a private company while it’s still in the growth phase, providing stakeholders with the flexibility to choose the time of their exit best suited to them.
So, it’s important for the investor to know the pros and cons of both the private and public markets summarised here:
Visibility – the status of a publicly-listed company is completely visible on the stock markets and through the financial pages of the popular press as well specialist media.
The situation is opaque for privately traded companies, and requires diligent research although, increasingly, specialist media and investor platforms have grown up to service the demand.
Liquidity – as we have already shown, buying and selling on the public markets has always been an easy process, even more so in recent decades as the traditional paperwork and famously raucous stock exchange trading floors have given way to much faster electronic trading. In short, people can invest and withdraw their money swiftly.
The arrival of equity crowdfunding and the private company secondary market ATSs means that trading becomes possible to a much wider investor base, although the private company issuer still needs the services of a regulated broker-dealer, lawyer, marketing company and other professional expertise to manage its offer to investors.
Investors should recognize and accept the risks associated with investing.
Certain investments may require you to keep your holding for periods of many years with limited or no ability to resell unless there is a strongly regulated secondary market.
You may also have limited access to periodic reporting, see your holdings decrease and increase in value, or even lose your entire investment.
Investors should decide for themselves whether to make any investment, basing this on their own independent evaluation after consulting with financial, tax and investment advisors.
The Knowledge Hub does not constitute financial advice whatsoever, but rather provides basic general industry information.