One of the stock themes of private market investing is the need for wider access. Technology-driven solutions appear to be a big part of how this is going to happen. We interview a firm making waves in the space.

Access to alternative non-public assets – which have grown rapidly over the past decade – needs to be widened. And InvestX argues that technology holds the key for "democratizing" this area.

In April, the Securities and Exchange Commission said that fundraising in global private markets had reached a record high of nearly $1.2 trillion, an increase of nearly 20 per cent over 2020, and a threefold increase over the past decade. Private assets under management reached an all-time high of $9.8 trillion as of July of this past year, an increase of around 33 per cent from $7.4 trillion the year before. US private fund assets have increased 70 per cent in just five years.

InvestX works with clients in the US and Canada, including broker-dealers, advisors, RIAs and other firms, to provide access to private securities, Brian Schaeffer, managing director at the firm, told Family Wealth Report in a recent call. 

There is a big need for regulators to make it easier for investors outside big institutions and the ranks of the ultra-wealthy to get a seat at the private markets table, he said. 

“A huge percentage of the public have been ring-fenced into equities and bonds that have dramatically underperformed [private markets]…just look at what’s happening now,” he said. The S&P 500 Index of US shares has fallen more than 13 per cent since the end of 2021.

A number of business platforms, such as CAIS (see an interview here), iCapital Network, Moonfare, and others, are seeking to give mass-affluent investors, and those in the lower reaches of the HNW sphere, a chance to buy into these asset classes. Historically, private equity funds have required at least $1 million for investors to have even a chance to play, and the most desirable funds have been out of reach. The SEC has adjusted its Accredited Investor rule to widen access, within certain limits. Separately, the rise of distributed ledger technology – blockchain – has seen moves to "tokenize" areas such as private market assets. (See the example of Swarm, here.)

Schaeffer referred to technology allowing “fractional” ownership of shares. Instead of requiring a stake of at least $1 million to play in a market, the technology enables broker-dealers using the InvestX GEM platform to operate in smaller sizes, he said. 

Also, the more fractional ownership approach, and one that involves investing in late-stage companies, allows for more liquidity, significantly minimizing holding periods of private equity, he said. 

Only broker-dealers are on the InvestX GEM platform, such as Jefferies, Canaccord, Virtu Financial, Benchmark and Raymond James, he said. 

The InvestX GEM term refers to the “Growth Equity Marketplace” which the firm launched in February last year. This allows broker-dealers to transact in private equity. The service offers price discovery and the firm said this helps remove the typical long holds of private investing. The trading platform allows for block trading of private companies and acts as a secondary market for InvestX’s special purpose vehicles. 

The regulatory landscape
The regulatory world that the industry currently operates in is out of date, many of the rules date back to 1933, Schaeffer said. 

In the SEC, there has already been an adjustment to the definition of what an Accredited Investor is. SEC chairman Gary Gensler is likely to continue looking at this area, Schaffer said. 

InvestX has grown rapidly, from 20 staff last year to almost 70 staff now. The business was able to keep growing during the pandemic, Schaeffer said. “We are not just expanding in terms of technology, but also on the human capital side.”

In a speech, SEC commissioner Caroline Crenshaw said the expansion of private markets contrasted with the decline in market share of public markets. There has been a dramatic contraction in the Wilshire 5000, a wide collection of US firms. In 1998, there were 7,500 companies in the index, today that number has dropped to about 3,500.

She warned: “The influx of capital to the private side of the industry, coupled with the severity and frequency of misconduct that our agency is uncovering (even with the limited information we are able to collect) suggests to me that our recent rulemaking may not have been the right approach to serve our goals.”

“The incomplete visibility that we have into the private markets tells me that we need more information to regulate and to ensure every American can adequately save for their children’s education and their own retirement. Quite simply, we need more insight, more education, indeed more data, to be able to effectively protect investors, before the big frauds occur,” Crenshaw said.