Beyond the familiar world of financial headlines, a vast network of private companies fuels global growth. In this context, many people are researching the subject to understand What are the private capital markets in business.
Firstly, the private capital markets, operates under different rules and holds potential for investors and businesses alike. In today’s post, we’ll explore practical aspects regarding the inner workings of this hidden ecosystem, its challenges, and its future.
What are private capital markets in business
If you’re looking about What are private capital markets in business, there’s a simple way to explain it. Basically, the private capital markets are a field of the financial system where investors provide funding to privately held companies, i.e. those not listed on public stock exchanges.
These companies can vary from start-ups to more established companies seeking to expand or restructure.
With its particularities and own regulations, the private capital markets are and dynamic ecosystem that plays an important role in the world economy. In the next section, we’ll talk more about this, contextualizing with public markets.
Public vs private markets
The financial world is broadly divided into two segments. Both segments contribute approximately 50% of the world’s GDP. That’s where the similarities end. These two segments are the public and private financial markets, and they are vastly different.
The public markets generate 95% of the noise and the news. They are generally very efficient, fluid, and well-served by technology. These are the financial institutions and companies that we read about and see daily on TV. As of May, 2022, there are approximately 58,500 publicly listed companies on the planet. In all, these companies have a market capitalization of about $90 trillion.
Public companies have been increasingly going private for over a decade, fueled by the costs of keeping a public profile and the requirements of Dodd-Frank and Basel III. A larger proportion of public capital is in the form of debt, with many companies implementing aggressive share buyback programs. This has also decreased the secondary market liquidity, while the illusion of liquidity is maintained by the approximately 70% of trades generated by algorithmic trading. The retail investor is increasingly underserverd in the public markets.
Compare all this with the approximately 285 million private companies, of which private equity invests barely $9 trillion. However, the trend is rapidly changing. Since 2009, more capital raising has been done by private companies than by public companies, sometimes by a factor of 2.
Insights on private capital markets
What is especially interesting about the rise of private markets is that the trend is changing despite the private markets not having any unifying central authority or even a regulatory consortium. Private markets are significantly underserved by technology. For many participants in the private markets, technology means moving from a physical Rolodex to an electronic one (mostly, a spreadsheet).
Traditional banks have evolved into institutions that make it easy to collect retail savings and funnel them into institutional investment firms or lending back to retail or SME customers. There has been no infrastructure for retail private investments or private capital raising over the last couple of hundred years. For this reason, the private markets remain fractured and fragmented. The participants include broker-dealers, CPAs, law firms, funding platforms, auditors, transfer agents, and various auxiliary service providers (such as for KYC screening, custody, escrow, payment processing, etc.). All of these participants exist to connect private companies seeking to raise capital with private retail investors.
Attitudinally, private market participants want to remain private. They want to retain their individual branding and serve their communities and niche markets. However, they see the potential for tapping into the wider retail market, even internationally. The challenge remains how to do it efficiently.
On the public side of the market, it is easy to conduct trades after the accounts have been set up with brokerages. Anyone with a smartphone can place a trade for a publicly listed company and get a trade confirmation within seconds (assuming high liquidity and that the markets are open). A similar trade with private shares takes several weeks.
From all this, we can see that the private markets are on the rise and, with supportive forward-thinking legislation such as the JOBS Act, opening up participation by the retail investors in a much more direct way. Private markets are not only here to stay but increasingly becoming more democratized.
What is missing is an efficient infrastructure of trust. That is a topic for another blog.