A recent report shares that Nasdaq Private Markets (NPM), a secondary trading platform for shares in private firms, has booked $6 billion in trades so far this year. In total, since its creation, NPM reports over $55 billion in transactional value and more than 250 “unicorn clients.” This reflects the rise in prominence of private markets – meanwhile, public markets have become stagnant at best.
As reported by WSJ.com, “This shift is changing what it means to be a private company, rekindling fears about how well the public markets are working.” Ironically, some in Washington, DC, believe that undermining private markets is the solution for improving public markets. How wrong they are.
At one time, public markets were where private firms sought growth capital. An IPO was a badge of achievement, where regular people could invest and capture capital gains alongside big money. Today, an IPO is more of an exit strategy, after much of the fast growth has been tapped. It is obvious why private markets have boomed while public markets have withered. It is the policymaker’s approach of pursuing a path of rule upon regulation in an attempt to remove all risk for the hoi polloi. Another perspective is aggressive regulation has been excellent for the wealthy as they jump ahead of the capital gain line while retail investors get inside the beltway lump of coal. While this is obvious to most, the nation’s top securities regulator, the SEC, has spent the last few years attempting to make things worse.
The report above notes that “the average private company is older and worth more than ever before. The median IPO company is 10 years old, up from 6 in 2000.” Private Secondary markets enable the liquidity early shareholders desire or need, helping the private company provide a viable exit path. Demand meets supply.
So what is the solution? First, pump the brakes on the regulatory onslaught. For example, pursuing climate disclosure rules as approved by the SEC (but locked in litigation) makes absolutely no sense at all. The SEC should shift to reverse and look for ways to reduce the regulatory burden and affiliated costs and mitigate the damage the rule-making Mandarins have caused.
One path to democratizing access to private securities is updating the Accredited Investor definition to be based on sophistication, not a wealth metric that disenfranchises the masses. Another is making it easier for funds that invest in private securities to be accessible to retail investors.
While the path may be clear, leadership in Washington, DC, has been missing. This is not uncommon. Hopefully, the incoming administration and new leadership at the Commission will address the shortcomings in our capital markets and let the little guy in.