Move Over Private Equity: Trading Platforms Are Helping Investors Tap Pre-IPO Companies
Nasdaq’s joint venture with large financial institutions is the latest entrant into the private share trading business.
Private equity funds are no longer the only way institutions can invest in non-public companies.
In the past year, a spate of companies have launched private trading platforms to keep up with market demand for access to assets that are not publicly traded, including those that haven’t yet been tapped by a private equity or venture firm.
Most recently, Nasdaq, SVB Financial, Citi, Goldman Sachs, and Morgan Stanley on Tuesday announced a joint venture to build a secondary trading platform for institutional investors.
The platform will allow investors to access and execute private company stock transactions using technology. According to the announcement, this will increase transparency for investors.
“The one thing that I think we can all agree to at this point is that the secondary markets are not a moment in time need,” Eric Folkemer, president of Nasdaq Private Market, told Institutional Investor. “Many of the stakeholders or employees expect it to a degree, especially as companies are staying private longer.”
Nasdaq Private Market has been operating since 2014. This deal brings on new investors and spins the business out into a standalone firm. “I’m getting commentary from buy-side institutions that are incredibly excited to have a more established and trusted venue in this space,” he added.
Nasdaq Private Market isn’t the only firm entering the industry, though. CartaX, for instance, launched its business earlier this year, pitching liquidity for private company shareholders and access to these assets for institutional investors.
Meanwhile, InvestX, a private equity marketplace for broker-dealers that has been operating since 2014, launched GEM, its trading platform, in February.
“I did a lot of research on private markets, and I saw a growing market, one that was pistol hot,” said Brian Schaeffer, managing director at the firm, by phone. “Demand was so great that you could see that the SEC would have to pay attention.”
InvestX works specifically with regional broker-dealers — firms in the same category as Raymond James, Oppenheimer, and Virtu — according to Schaeffer. And they need help on the deals. “It’s such an antiquated high-touch process,” Schaeffer said. “These transactions can take weeks or months.”
The company doesn’t look at early-stage ventures: The ones that trade on their platform are unicorns, or what InvestX calls “pre-IPO giants.” These are firms that have made it past the $1 billion valuation mark and are between six months and three years out from an IPO.
By comparison, Nasdaq starts earlier in a company’s lifecycle. “It’s not just for the late-stage companies,” said Folkemer. “A number of clients that we work with start as early as series B.”
But as more firms begin to launch private trading platforms, they expect that regulators will follow.
“The SEC is going to look at this and look at it very hard,” Schaeffer said. For one, he added, the regulatory body is looking to redefine what an accredited investor should look like, which could change the clientele of these platforms.
As for Nasdaq? Folkemer said that the firm already has experience self-regulating, thanks to all the work it does in the public markets.
Private share trading is “not as regulated as the public markets,” he said, adding that institutions need to ask, “How does the trading platform regulate and govern itself?”