The private market is often considered an exclusive club. While it may tout accessibility for everyone, only those with substantial personal wealth or connections can reliably find their way in through a secret door. In fact, there are many qualified “accredited investors” who don’t realize they can participate in this asset class, because they do not know where to turn for information and investment opportunities. More and more companies are launching platforms to help open up and navigate this elusive market. But why is this taking so long?
Challenge #1 – Lack of Global Digitization
The private market is the largest in the world that has been slow to digitize. In fact, most of the transactions are still done by calls and emails, and many require the aid of an attorney to complete. This market has assets in aggregate value of hundreds of trillions of dollars, yet deals are still made with little tracking and oversight, making it nearly impossible to automate or digitize. Furthermore, almost all deals involve three parties—buyer, seller, and company—requiring more negotiation, which translates into time and cost.
Technology can help manage ownership and trading of these private assets, but unlike the public market, the transaction is not yet completely accessible. For example, if you want to buy shares in publicly traded Tesla, there are numerous apps and brokerage houses where one can buy and sell shares online within seconds. But if you want to buy shares of Revolut—a private company worth approximately $30 billion—it requires time, and in many cases, knowing the right people.
Opportunity: There are several companies trying to solve this problem and increase access to the private market. Forge, EquityZen, Nasdaq Private Market, Zanbato, CVEX, Rialto, Texture Capital, tZERO, and others offer solutions allowing investors to efficiently sell and buy private company shares. With the right technological advancements, this market will be more accessible and the cost to participate will decrease.
Challenge #2 – Limited Access
While the general public is encouraged to invest in public companies like Apple, Google, and Tesla, private company investing is only available to those who can demonstrate a certain net worth and a capacity for extreme investment risk.
One such group is “accredited investors.” Accredited investors include high-net-worth individuals, banks, insurance companies, brokers, and trusts. Currently, the average U.S. investor can qualify as an accredited investor by having at least $200,000 of income individually (or $300,000 combined with their spouse) for the previous two years and the current year; or by having a net worth of $1,000,000 or more, excluding the value of their primary residence.
Because these investments are only open to a select few, companies generally do not have to share their earnings with the public, submit financial statements for audit, or publicly file reports for the investor community to review. The decreased level of transparency makes it difficult for outsiders to review accurate and timely information before making an investment decision.
Opportunity: New technologies like immutable audit trails, digital securities, and other decentralized financial solutions are democratizing this previously concealed market by making it more transparent and accessible. Leaning into new technology and digital solutions will open the private market for new investment, leading to more participants and increased diversity of investors.
As Carine Schneider, President of AST Private Company Solutions Inc. that provides the cap table software Astrella, says in her most recent book, The Democratization of the Private Market: “If the private market can grow from an exclusive club headquartered in the heart of Silicon Valley to an opportunity for interested investors worldwide, it should benefit everyone and positively impact the global economy.”
Challenge #3 – Regulations
In order to have a secure and well-functioning private market, domestic and global regulatory requirements must be carefully balanced. Without appropriate regulations, the market can be easily manipulated and may become unstable. On the other hand, current regulations create unnecessary hurdles and prevent a large portion of the population from participating.
With existing regulations, only private growth companies and accredited investors can invest in the private market, so the investment opportunities are effectively only available to those who already have wealth. Depriving those who don’t have a wealth of assets from the opportunity to invest in this high-growth (and risky) asset class impedes their freedom to make their own financial decisions.
How can we create more opportunity to invest in this market? With careful review, we can alter the definition of “accredited investor” to allow certain investors with significant educational background or knowledge to participate without a fixed net-worth benchmark. There could also be opportunities for companies that have achieved a certain size (revenue, valuation, earnings) to be made available for investments among a broader audience.
Opportunity: There is always a tension between access and appropriate controls when discussing private market investing. With properly balanced regulation, these markets can flourish by providing access and liquidity to all investors, making them more efficient and robust.
Ready to get involved?
The private market is expanding, but in the process is revealing several challenges. Interested in learning more? Whether you are an experienced investor and business owner, or you are new to investing and curious about how this near wide-open space will be regulated, The Democratization of the Private Market will walk you through the opportunities and challenges of private market investing, plus how to get involved in this early stage of democratization.