Private markets have been growing at an extraordinary rate over the past two
decades. Today they represent an estimated $11.5 trillion asset class, according to
McKinsey’s 2022 Global Private Markets Review and are poised to grow, say
Forbes, to $30 trillion by 2030. Conversely, public securities have dwindled.
The number of public companies has reduced from 8,000 in 1996 to just 3,290
today. In fact, just in recent weeks, SEC Commissioners have asked the SEC Small
Business Capital Formation Advisory Committee to address the issues surrounding
the decline of US IPOs.
Yet, this asset class has lacked infrastructure, growing through tedious
multilateral negotiation, physically documented agreements, and a protracted
investment process. This inefficiency has limited the participation in the initial
Additionally, investors may find a lack of possible exits for these investments
compared to public assets, potentially restricting investors from participating.
Capital may be tied up in the investment for the duration without the ability to
separate the investor exit strategy from the corporate exit strategy or private
fund monetization mechanism.
This inability to exit an investment, win or lose, is a leading reason investors
express hesitation with investing in private securities.
This limitation not only impacts any potential monetization capability post
investment but actually limits the participation in the initial investment since
investors need to incorporate illiquidity among other risk factors into their initial
Therefore, by incorporating a classic player such as an Alternative Trading
Systems (ATS) to provide a formalized, efficient solution to exitnig an investment
could change how individual investors view the private markets.
The importance of a secondary trading environment for private securities is
essential for the overall market as well.
Public markets have proven that the greater the efficiency of the market and the
greater the opportunity for participation after the initial capital raise, the more
robust the marketplace.
US public markets thrived with the change from quotes in eighths and sixteenths
to quotes in pennies. US public markets thrived with the advent of private trading
systems (eventually known as ECNs – Electronic Trading Networks) which enabled
buyers and sellers to transact between the spread. The greater the opportunity to
participate in the secondary market, the more efficient the market became and
the more the market grew.
The private securities market finds itself in unfamiliar territory, but not unfamiliar
territory for markets. There are lessons to be learned from capital markets
traditionally but, thankfully, there are significant advantages in the current day
environment to enable the private markets to accelerate its rate of change and
deliver to all participants.
Let’s talk about some of the enhancements to be deployed. First on the list is
technology. The adaptation and diversity of digital technologies enable systems to be built
and integrated much cheaper and quicker than legacy technologies.
The investment process has numerous components to it that need to be
integrated, flow smoothly, reconciled, and perhaps most importantly scale. (We’ll
get back to that shortly.)
Digital technology and often basic API (Application Programming Interface)
connections, provide simple yet efficient integration options to the wide variety
of component parts needed for operational efficiency.
So, trading systems can integrate with clearing, risk, accounting, and analytics
systems in-house and just as easily with banks, clearing houses, transfer agents
and the like externally.
Second is the ability to diversify participation. Technology solutions procured
today enable all kinds of investors access to trading platforms.
Today, ATSs like Rialto Markets’ enable retail investors direct access to its
marketplace. Participation is not limited to only wealthy individuals or
institutions or broker-dealers.
Hence, it is essential these markets have the ability to scale.
The retail market is massive in its sheer number of participants. Regulators are
correct in their unwavering commitment to protecting retail investors. Therefore,
to assure their protection, the same ecosystem that provides the entirety of the
investment experience to institutional players needs to be able to scale to provide
the same to a significantly larger number of retail players.
Though it is difficult and there are numerous technical, operational, and
regulatory hurdles to overcome to deliver these systems, they are essential for an
efficient marketplace that will protect all investors, expand access to capital for
companies seeking it, and expand the universe of investment opportunities for all.
Ultimately, it will prove to create a new capital market world not by eliminating
the traditional world but by enhancing and expanding it.