Want to hear a very poorly kept secret? Access to private investment opportunities is extremely limited and inequitable. This has been true on Wall Street for decades due to some rather stringent regulatory hurdles governing the marketing of private offerings, as well as the critical need to keep private deal information, well, private. Historically this has meant that investment banks hired on behalf of private companies and funds to raise capital have been left to manage closed, manually-driven processes where only their small roster of “known investors” were even contacted about the opportunities. Given the size of the new issue private markets (roughly $1 trillion per annum), this is quite remarkable. Fortunately, the tides are now turning.
Thanks to new legislation under the JOBS Act, as well as the advent of some innovative technology, the private capital markets are opening up. Qualified investors now have an opportunity to access the marketplace without having to be on a “preferred investor” list, and can more easily navigate the entire private capital spectrum – from seed investments to seasoned corporate issuers-using new online portals.
While this is certainly a positive step towards more efficient markets, investors should proceed with caution as the business models of these portals vary. Take Crowdfunding platforms as one example. These platforms have the potential to greatly expand capital flow for early-stage companies at reduced costs. For the most part, however, crowdfunding platforms do not require third-party professional intermediaries to prepare and diligence their offerings, which results in an un-curated and possibly high risk marketplace. Other private platforms can reduce transaction costs and improve market transparency. Here too investors need to understand each platform’s perspective on a number of factors including:
- Transaction independence (how the platform is getting paid)
- If and what role professional intermediaries play in the process
- What the due diligence process is on the deals you are seeing
- How your information is used
Some of these factors clearly have the potential to create conflicts of interest.
Bottom Line: The world of direct private investments is changing. Qualified investors of all stripes have never had such a broad opportunity to participate. Various business models are now in place to capitalize on this transformation, but the jury is still out on which will succeed in delivering sustainable value to investors. As always, buyer beware!