The private markets have been gaining momentum for quite some time now.
The institutional, as well as private investors, are turning their focus on private markets primarily because of attractive returns that come with adjusted risk and limited dependency on the traditional public market.
In the public market, as investors, you are limited to investing only in publicly listed companies. But what if you wish to own shares of an unlisted firm?
Would you like to buy shares of companies like Uber, whose services you tend to use on a day to day basis?
If yes, then how would you proceed to buy the shares of any company that is yet to launch its IPO?
Are you interested to know the answers to these questions?
Well, then put on your reading glasses right away!
In technical terms, a private market involves investments in either debt or equity of companies that are not listed publicly or are privately-owned firms.
A few years ago the access to unlisted firms was very hard for traditional or retail investors.
Yes! You read it correctly.
The investment in private or unlisted companies was difficult to access for common investors. But, thanks to the evolution of private markets has made investing in unlisted companies rather easy and a means to diversify a portfolio.
The investors put in their money in unlisted or private companies with the aim of earning good returns. The rationale behind the concept of the private market is to increase the market value of an unlisted company by investing in it and in future sell the shares through either an IPO or buyout. And, in the end, the investor fills his/her pocket with good profit!
Along with this, with the entry of private markets into the financial sector, employees and shareholders of a start-up now have options other than initial public offering to liquidate their shares.
Imagine, if there was no concept of private markets, the employees (who own shares) of start-ups or shareholders of unlisted companies would have limited options like an IPO or acquisition for selling their shares and making an exit. With the emergence of more private markets, such shareholders have multiple ways through which they can liquidate their shares in the private market and would not have to unnecessarily wait for the IPO.
In order to understand the increasing popularity of the private markets, please have a look at the graph (taken from Mckinsey’s report on Private Markets Review)
Now that I have explained the concept of private markets to you and its importance from the perspective of investors, let us explore the other side of the coin.
Let us understand why a company (either unlisted or listed) would go on to raise capital through a private sale of its equity or corporate debt.
In the former part I thoroughly explained the definition of the private market and its significance for investors, it is time to understand ‘why do companies issue private placements.’
There are many top companies that still are not listed on any stock exchange. The reason for not going public could be many, but there are times when a company just wants to remain private. It does not wish to disclose its financial transactions as well as pivotal company information.
If it chooses to raise funds through an IPO then it would be obliged to disclose its financial reports and other information to all the investors out there. On the other hand, with the private placement, the transactions remain confidential among a group of shareholders.
Secondly, private placements give the companies an opportunity to diversify their sources of capital. And, having a diversified source of capital helps the companies to sustain during the market upheavals or when banks face liquidity issues.
Thirdly, there are many companies that go ahead with private placement because they run out of their borrowing capacity from lenders like private equity firms, banks etc.
Lastly, the overall cost involved in issuing private placement is lower as compared to the cost involved when launching an IPO. So, if a company is looking for a cost-effective way to raise capital, then private placement is a viable option for them.
One of the most important takeaways for companies that choose to issue a private placement build a long-term relationship with the shareholders/investors. Generally, in private placements, the investors typically buy shares to hold them for the long term and their goal is not to sell them to other investors. In this way, the concerned company builds a trustworthy relation with its handful of investors.
When the trend of the private market began to make a buzz, Nasdaq jumped right in to grab the opportunity and forayed into the pre-IPO market through Nasdaq Private Market.
Nasdaq Private Market is a joint venture between Nasdaq and SharePoint and it was in 2015 that its full ownership came into the hands of Nasdaq. The entity provides a centralized online platform for private or unlisted companies to raise funds. It facilitates the interest investors with investment options in a realm outside of cliche venture capital.
Further, Nasdaq Private Market serves as a platform for employees to liquidate their company shares. The employees no longer need to wait for their company to go public when they have a better option to sell off their shares before it!
For those who are unaware, it is not the first private market launched by Nasdaq as it has made several attempts in the past as well. It tried to come up with a secondary market for all the unlisted companies back in May 2011 by launching BX Venture Market, especially for early-stage firms. Even before this, in 2007, it had also launched Portal Market. Unfortunately, both these projects or attempts did not sustain in the long run.
But, with Nasdaq Private Market, is definitely thriving and the possible reason behind it is:
Unlike other platforms that facilitate the buying and selling of shares of unlisted companies, Nasdaq Private Market is regularized and has stricter rules.
The companies that choose to get listed on the Nasdaq Private Market should have either raised a minimum of $30 million in funding rounds in the past two years or have a valuation of $50 million.
Further, Nasdaq Private Market leaves the decision of going public completely on to the entrepreneurs.
Although I spoke in length about the features of the Nasdaq Private Market but still if you are not convinced then let me lay out some statistics for you!
Since 2013 (i.e its year of establishment), it has successfully facilitated more than 450 liquidity programs (until 2020) and between these 7 years, it has witnessed the participation of around 47,000 shareholders.
The year-wise performance report is mentioned below:
Highlights: Nasdaq Private Market Report Of 2019
In 2019 it went on to facilitate a total of 87 liquidity programs for private companies.
In the same year, the annual transaction worth $4.8 billion was carried out on the online platform.
There was a steady hike in the third-party tender offers on the online platform.
The year 2020 proved even better and it went to facilitate 90 liquidity programs for various private companies
Furthermore, last year an annual transaction worth $4.5 billion was carried out.
I hope to look at the above graphs and statistics you are convinced of the surging popularity of the Nasdaq Private Market.
Therefore, Nasdaq Private Market is serving the purpose of those investors who want to explore their investment horizon and are intrigued about investing in unlisted companies.
Since diversification is good for an investment portfolio, one can try out investing through the private market as well!