Private markets are continuing to grow rapidly as companies stay private longer and more institutional capital flows into the space, but this growth will require continuing development of the underlying market mechanics and processes.
Capital markets are a critical part of a dynamic, market-driven economy, where private markets play a much more opaque role than public. The niche private market, as it stands, requires a more robust, technologically-enhanced approach to data management, digitizing workflows and implementing and aggregating new systems than the public market. However, private capital markets have not had a technology upgrade in decades, resulting in low levels of transparency and liquidity, leading to higher cost of capital for issuers and sub-optimal allocation of capital by investors.
Evolving market behavior, as proven with the GamesStop saga, paired with private market growth leads one to believe there is hope for private markets to flourish, but first, a necessary systematic upgrade is needed for the private markets industry. Deloitte predicts global PE assets under management to reach $5.8 trillion by 2025.
Private markets are continuing to grow rapidly as companies stay private longer and more institutional capital flows into the space, but this growth will require continuing development of the underlying market mechanics and processes. Institutional marketplaces for private capital are new, unique mechanisms built to grant investors access to private markets, streamlining the current market structure for private placements. With an updated market structure, liquid secondary markets can help companies achieve a better valuation by presenting investors with a lower level of liquidity risk through secondary trading opportunities than is typical for many private investments.
Nascent digital broker dealers are working to build a new market structure leveraging blockchain and tokenized securities. In addition, the shift to digital securities, where ownership is recorded on a blockchain, can improve shareholder management and record keeping.
Private markets are in need of a marketplace for capital where companies can connect with investors and efficiently and securely share data all while transacting in the primary and secondary market. If a private company is reluctant to share data with potential investors, any concerns over competitors gaining access to proprietary information can be addressed using modern technology solutions, blockchain included. In a blockchain-powered marketplace where securities ownership and investor identities are recorded on a public ledger, more functionalities can be leveraged in order to manage investors and their access to proprietary data.
Digitizing and automating the process of information sharing via blockchain technology and smart contracts makes it possible to streamline workflows and removes significant friction in the functioning of private securities markets. Blockchain technology paired with smart contracts allows companies to create a digital ledger of securities ownership, vastly improving transparency, enabling better securities servicing and shareholder management and programmatically enforcing complex compliance regulations.
It’s time for a systematic technology upgrade. Tokenized securities models offer a new way of designing market structure and as private markets advance, so must the technology.
Tokenization invites an entirely new paradigm for settlement, margin, stock loan and other core markets functions to advance under one umbrella of distributed ledger technology, rather than relying on centralized clearing counterparties. In the recent Gamestop short squeeze, for example, if tokenization had been a factor in the settlement cycle, brokers wouldn’t have had to restrict trading to manage risk because the settlement would have been instantaneous.
While private markets continue to evolve, now is the time for professionals to enhance their systems and re-invent existing market structure using emerging technology, unlocking new opportunities for entrepreneurs to connect investors with a completely modernized, revamped approach to the marketplace.