The Private Market Opportunity
Why capitalising on private markets provides huge opportunity for exchange platforms
Private markets assets under management totaled $13.1 trillion as of June 30, 2023, and have grown almost 20 per cent per annum since 2018.
Several factors, including surging retail investor interest, more relaxed regulatory environments, the potential for high returns and increasingly burdensome IPO listing requirements have contributed to record levels of private equity investment this decade, with the EU being a key frontrunner.
Source: Invest Europe
The total equity amount invested in European companies in 2022, €130bn, was the second highest level in any year recorded, after 2021, and is 30 per cent over the average for the previous five years.
As interest in private markets grows and investors increase allocations to alternative assets, more innovation is needed in a few key areas to create a central and open marketplace infrastructure that resembles public markets.
However, the rise in popularity of private markets has exposed inadequacies in current infrastructures, which mainly include illiquidity and the lack of centralised market places to facilitate the efficient exchange of private equity instruments. As a result, several investment platforms such as Nasdaq Private Markets, Forge Global and Equity Zen have taken it upon themselves to provide just that. On these online platforms, investors can discover and buy and sell shares in private companies, and participate in funding rounds.
Forge Global, which merged with PE group Motive Capital in 2021, went public itself and agreed a strategic partnership agreement with Morgan Stanley in 2023 to launch a new platform for trading private market securities in the US. Subsequently Forge agreed a partnership deal with Deutsche Börse to create Forge Europe.
Such collaborations provide greater access to a wider range of investors, with Goldman Sachs also announcing this year that it is launching a new platform for trading private market securities. Other new platforms that have come to the fore include:
Investor engagement platforms. Companies like VCsnap and Dealroom are providing platforms that help PE firms and VC firms to communicate with their investors more efficiently. These platforms provide features such as investor portals, investor updates, and investor relationship management (IRM) tools. As more retail investors come into the market such tools can also be used for education.
Peer-to-Peer Lending (P2P) and Crowdfunding. P2P lending platforms and crowdfunding portals allow individuals and businesses to directly access funding from a network of investors, allowing borrowers to secure loans, and investors to earn interest or equity without the need for a traditional financial institution. These platforms leverage technology to connect borrowers and lenders directly, eliminating the need for traditional financial intermediaries. Within the UK, for example, these include Crowdcube and Seedrs as the leaders for crowdfunding and Funding Circle and Zopa for P2P lending. Historically, most participants in their funding rounds have been retail investors.
Digital Banking and Fintech. More generally, digital banks and FinTech companies are offering a wide range of financial services, from payments to lending and investment management, directly to consumers. These platforms provide convenient and cost-effective alternatives to traditional banks. A number of these services are collaborating with private market providers to enable greater efficiency of funds transfers.
Direct Real Estate Investment. Real estate crowdfunding platforms allow investors to participate in real estate projects directly, including residential and commercial properties. This enables individuals to diversify their real estate portfolios without buying properties themselves.
Below shows a timeline of recent exchange collaborations with private market platform providers.
The growing interest towards private markets has led to several exchanges seeking to capitalise on the opportunity, and democratise access to this asset class by making it easier for investors to allocate capital to private markets, while driving innovations in facilitation, intermediation and technology and ultimately bringing a sense of familiarity with platform functionalities that can be seen in public markets. As the data above suggests, deeper involvement in the private markets space is shaping up to provide excellent diversification for existing exchange platforms.