Private markets have historically relied on manual processing and in-person transactions which can take weeks to settle. Myles Milston, co-founder and CEO of Globacap, discusses how technology is transforming private markets processes and closing the efficiency gap to public markets.
Private capital markets have taken huge strides forward over the past decade. Assets under management (AUM) have grown 20% per annum since 2018, double the rate of public markets.
Over the past year, the secondaries market has also experienced a boom as private equity firms seek alternative exit routes to stagnating public markets.
2023 was the second-largest year for private markets secondaries in history, with transaction volumes growing from $103 billion to $114 billion.
This growth wouldn’t be possible without increased adoption of new technology which has improved access and levelled up efficiency in private markets. Long gone are the days of in-person transactions and slow, manual processes. Instead, digital infrastructure streamlines the execution of transactions, underpinning private markets’ rapid growth.
The struggle for efficiency
Private markets have historically fallen behind public markets when it comes to efficiency. Dematerialisation processes revolutionised public markets in the 20th century. Public markets are in essence already largely digital, with digital book-entries having almost totally replaced paper-form securities today. They are also easily accessible for everyone from a huge financial institution to an armchair trader.
By contrast, the arcane world of private markets has been slower to digitise, operating through expensive intermediaries with a great deal of red tape around ensuring secure, efficient cash custody and legal title transfers. Key processes such as investor onboarding, background checks and regulatory compliance, price negotiation, term setting and order confirmation, were, up until recently, carried out manually. All of this culminated in slow transactions, with settlement times taking weeks, or months, if not longer.
But there have been some big developments in recent times which are rapidly closing the efficiency gap with public markets.
Automation and digitisation
New technology, like workflow automation software, has brought digitisation and automation to private markets.
Private assets, from shares in private companies to units in private equity managers, can now be transacted and settled almost as efficiently and seamlessly as public markets. This significantly reduces the settlement cycle, lowering risk, and allowing a greater number of participants to allocate to private markets in the first place.
The digitisation of cumbersome processes such as securities issuance, administration, transferability, and settlement has streamlined transactions, leading to a reduction in costs, efficiency gains and improved access.
In essence, through automation and digitisation, technology is bringing public markets efficiency to private markets and this progress is making it a formidable force.
Deep funding
The secondaries boom
In addition, the rapid growth of the secondary trading market has eroded one of the key advantages that public markets offer investors: liquidity. As technological developments allow investors to buy and sell existing assets more easily, liquidity increases dramatically.
This has been facilitated by the rise of electronic marketplaces allowing issuers, brokers, employees, and early round investors to buy and sell shares. This confirms private markets developing market infrastructure for price discovery and trading in private shares, similar to that of stock exchanges.
Likewise, the inability of venues such as AIM to provide deep and continuous liquidity has reduced their value to many firms.
A shift in the market
Private capital markets are starting to rid themselves of dreaded Excel sheets, fax machines and other manual processes. Instead, participants can now expect automated workflows and rapid execution, making them more attractive than ever before.
With private capital markets’ AUM projected to hit $30 trillion by 2030, this will only accelerate as more players move into the space. They will bring with them expectations of digital processes from their experience in public markets which will help drive private markets forward.
This shift is already well underway. In recent times, Morgan Stanley Wealth Management announced the launch of its Private Markets Transaction Desk.
Meanwhile, new research shows two-thirds of institutional investors expect to increase private market deployments in 2024, while almost nine in 10 believe that private markets will continue to outperform their public market equivalents over the long term.
The transformative power of technology in private markets is undeniable. From enhancing accessibility and transparency to fostering efficiency and innovation, technology has revolutionised how private markets operate.
While private markets haven’t quite reached the efficiency levels seen in public markets yet, the gap is rapidly closing, driving growth and democratising access to investment opportunities.
