How Technology is Democratising Private Markets
Democratisation is coming to private markets
Technology is playing a transformative role in reshaping the private markets and the landscape of providers is diverse, with various companies leaning into technological innovations widely seen across public markets. Public markets have become simplified to the level of online direct market access to liquid markets, whereas private market access has generally been limited to illiquid products that require intermediation to access. However, the digitisation of private markets is opening up market segments that aren’t available to public market participants.
Digitisation in private markets potentially offers a wide range of benefits, such as increased efficiency, transparency and accessibility, for investors, asset managers, and other market participants. Among the areas ripe for technology-led enhancements are:
Online Platforms and Marketplaces: The rise of online trading platforms has made it easier for individuals to access retail investment services and products. These platforms facilitate the issuance and trading of private securities, allowing investors to discover and invest in a wide range of assets with relatively small amounts of capital. Online platforms provide low fees and administrative costs making investing in private markets more accessible. These include crowdfunding and peer-to-peer lending sites, which have expanded hugely recently and are already heavily used by retail. One such example is digital private equity (PE) investing platform Moonfare.
Middle Office Automation: Companies like SS&C Advent and Broadridge are providing middle office automation solutions for PE firms and venture capital (VC) firms. These solutions help PE firms and VC firms to automate tasks such as portfolio valuation, performance reporting, and compliance. Similar to the point made above, a large increase in the number of clients, and the idea that retail investors may be offered new fund type structures to aggregate their investments, rather than having Limited Partner status on their own, will need new reporting, compliance and valuation requirements.
Data Analytics and Due Diligence: Technology vendors are providing real-time private market data and analytics tools to provide investors with powerful insights into potential investments. They can analyse financial data, market trends, and company performance to inform investment decisions. For example, PitchBook Data provides data on PE, VC, and mergers and acquisitions, while Preqin provides data on PE, VC, real assets, and hedge funds. The more that retail investors come into these markets, the more likely it is that such providers will offer increasingly granular data products.
Capital and Cash Flow Management: Companies like BlackRock Aladdin and iLEVEL provide capital and cash flow management solutions for PE and VC firms, helping them automate tasks such as capital calls, investments, divestments, and distributions. As investment funds expand the numbers of clients accessing their services, they will need to digitise their back and middle offices just as funds operating primarily in the public markets have had to do.
RegTech platforms: These solutions automate compliance tasks, monitor changes in regulations, and ensure adherence to reporting standards. In addition, digital identity verification solutions enable the secure onboarding of investors and the verification of accredited investors, reducing the potential for fraud and ensuring compliance with any investor eligibility criteria.
Artificial Intelligence (AI) and Machine Learning: AI and machine learning algorithms can enhance investment strategies by automating trading, risk assessment, and portfolio management. They can also provide predictive analytics to identify investment opportunities, and extract insights that can be used by investors and other market participants. For example, data intelligence platform Altrata uses AI to analyse PE performance data, while AlphaSense uses AI to analyse private markets data from a variety of sources, including news articles, research reports, and company filings. Both companies largely use machine learning to produce their results, with AlphaSense also using natural language processing. These companies and others will provide more services to retail clients in the future, either directly or through, for example, brokerage or fund entities that can provide economies of scale to their retail investors.
Blockchain-based Tokenisation: One of the most promising applications of blockchain is in the tokenisation of assets. Essentially, this involves a creating a digital token to represent a real-world asset on a blockchain, enabling greater transparency and trade efficiency. The ownership of this token is stored on a digital ledger, and any change of ownership is recorded to the ledger. The PE industry is generally in the early days of its experimentation with blockchain, but adoption is gradually spreading across the financial industry, with large players such as Blackrock and JP Morgan publicly stating that they see the technology as driving the future structure of capital markets. Tokenised private equity is largely centred around breaking up funds into a more liquid and fractionalised investment vehicle, with tokens denoting ownership or share of the fund.
Technology is undoubtedly having a transformational impact on private markets. It has bought private and public markets closer together, and is fostering an environment of innovation and democratisation typically seen in public markets. In addition, the application of blockchain-based technologies to private markets will, going forward, help to unlock new efficiencies and opportunities for an industry that is notoriously cumbersome.