People love the return premium they can earn by socking away money in illiquid assets like private equity, until they don’t.
To address the conundrum of investors not being able to sell their stakes when they need to meet unanticipated cash needs, or when the public markets are under stress, Nasdaq Private Market is now offering a centralized venue to trade private equity funds and select mutual funds that invest in illiquid private assets.
“High-net-worth investors and smaller institutions are increasingly interested in these investments, but liquidity is the number one question,” says Eric Folkemer, head of Nasdaq Private Market, which has provided a trading venue for companies that aren’t publicly listed since 2013. He says the web-based platform’s regular auctions for alternative investment funds will spur demand from fund managers, advisers and investors, as well as more creative fund structures.
Nasdaq recently received the go-ahead from the Securities and Exchange Commission and the Internal Revenue Service to expand its private market to include alternative investment funds, according to Folkemer, who says one of the primary targets is private equity secondaries. There’s about $40 billion to $50 billion of private equity secondary trading a year, and about $100 billion waiting to be invested in such deals, he adds.
Secondary trading occurs when investors with money locked up in a private equity fund that has a life of say, 10 years, want to sell after five. These transactions are typically negotiated separately outside any centralized market.
Folkemer adds that the market could also help push demand for alternatives in the defined contribution market. Retirement plan sponsors and 401(k) participants may be interested in adding alternative investments to their fund options, but the current lack of liquidity is a crucial barrier.
“The trading of those securities will help create stronger movement in that industry,” Folkemer says. “But that’s a longer-term strategy for us.”
