By Alan Vaksman, Founding Partner, Launchbay Capital
While the public stock market is and always will remain a go-to option for institutional traders, in its current state the opportunities are less enticing than they were five years ago. Algorithmic trading, efficiency of the exchange systems and the shift from growth stocks towards dividends has fueled financial weariness; and widespread delays to IPO are causing financial professionals of all industries to look elsewhere.
Furthermore, algorithmic preferences and turbulent decision making by day traders on all-access platforms like Robinhood have taken away the strategy of certainty traders thrive on. Instead, now is the time to shift attention to the secondary market where data-driven valuations are just emerging, and the barriers to entry keep the fickle decisions of everyday consumers out of the mix.
Ensuring maximum gains and minimum risks relies on accurate valuations. For the past few years, valuations of publicly traded companies, especially within the tech industry, have become increasingly unstable. This is because now everyone, from executive level fund managers to retail investors, are reading the same news articles and making financial decisions on the same transactional platforms. Retail investors are arguably piloting valuations now more than ever just by their sheer numbers, and therefore hold the ability to make and break prices. This presents an issue for institutional traders since it leaves their potential earnings in the hands of inexperienced individuals, bias platform algorithms and unpredictable social media news feeds.
So, how is the private secondary market becoming a better source of alternative opportunities for institutional traders? Well, for one, retail traders are barred from the equation. The barrier to entry requires a much larger ticket and an ability to wait out funding rounds, which retail level entities rarely have either of. This means the business being done within the secondary market is by seasoned professionals across all types of financial institutions, and therefore, the decisions being made are more professional rather than idealistic.
Additionally, the process of doing business within the secondary market is becoming easier. The widespread shift in attention to opportunities in the private market has created a significant need for more online platforms that facilitate the process. Rather than being done through opaque, private equity-style one off transactions, institutional traders now have a range of data-driven platforms to choose from that allow users to see how much individual shares are being bought and sold for in near real time and be connected directly with a broker to sign and seal the deal.
The increased price transparency and trading volume we’re seeing across the secondary market can be directly attributed to the rise of the brokers and data-driven platforms and is the reason valuations of private companies have become much less of a mystery than before. The price of institutional size secondary trades are backed by outlooks, like projected growth rates, recent or upcoming funding rounds, expected time to IPO, and most importantly, by professional investors. Rather than sourcing major investment houses’ underwritten share prices, analysts are now frequenting estimates pulled from private market data to predict how much major companies likeStripe and Reddit will be worth if and when they go public.
Institutional traders have a lot to gain from the secondary market’s increasing reliability and ease of access. In terms of where to look and what to expect, fintech companies are back and growing from a lower valuation, presenting the possibility of high profit margins on an accelerated timeline.
While nothing about the stock market lasts forever, whether public or private, the opportunities arising throughout secondaries are undeniable. More than a trillion in funds are locked in private equity and venture capital and require liquidity solutions to access. As a result, we’re now seeing significant interest in exploring the semi-liquid private markets from investment banks, such as Morgan Stanley which recently launched its own private markets transaction desk to support secondary trading for shareholders of private companies. Additionally, in the United Kingdom, rumors of Finance Minister Jeremy Hunt’s plan to launch a trading exchange for UK private firms’ shares this year has spurred further intrigue by the masses in trying to explore this asset class.
Whether you’re simply tired of the algorithmic nanosecond trading game or riding the temperamental wave of public social media driven pricings, the private market is an exciting option that’s both dependable and growing in abundance.
As a Founding Partner of Launchbay Capital, a leading multistage investment firm and digital market data platform, Alan Vaksman oversees a globally diverse team of seasoned VC and secondary market professionals committed to creating liquidity in the technology ecosystem. The firm recently launched a new secondary liquidity investment vehicle with the first close of the firm’s $100 million secondary growth fund. Throughout his 20+ years of experience in the financial sector, Alan has held senior roles at international banks and leading consulting companies, successfully built and exited multiple industry-related startups, and led investments in major companies like Monday.com, Lemonade and Klarna.
