The Digitisation of Private Markets
PE undergoing structural shift
Technology is playing a transformative role in reshaping the private markets and the landscape of providers is diverse, with various companies contributing to different technological innovations. Many of these providers and technologies have been available in the public markets and are now being deployed in private 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. Digitisation in private markets potentially offers a wide range of benefits, for example increased efficiency, transparency and accessibility, for investors, asset managers, and other market participants that today may be geared up for serving a client base in perhaps the hundreds but are seeing demand for much more.
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. Several investment platforms such as Nasdaq Private Markets, Forge Global and EquityZen are aspiring to make a central market place for private markets.
● Middle Office Automation:
Companies like SS&C Advent and Broadridge are providing middle office automation solutions for PE firms and venture capital firms. These solutions help PE firms and venture capital 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 (LP) status on their own, will need new reporting, compliance and valuation requirements.
● Data Analytics and Due Diligence:
Technology vendors are providing real-time 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 private equity, venture capital, and mergers and acquisitions, while Preqin provides data on private equity, venture capital, 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, Altrata uses AI to analyse private equity 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 (ML) to produce their results, with AlphaSense also using natural language processing (NLP). 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.
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