Secondary platform sales

Three weeks and three different acquisitions of secondary platforms by Wall Street giants. Industry Ventures acquired by Goldman Sachs, then EquityZen acquired by Morgan Stanley, and now Forge Global acquired by Charles Schwab.

The asset management industry clearly heard BlackRock’s Larry Fink call for portfolio construction to move from 60:40 stocks:bonds to 50:30:20 stocks:bonds:privates. A surge is underway for individual investors seeking private market exposure.

The focus of the recently acquired secondary platforms is mainly the ~50 best known late stage companies. But we consider in this post whether the earlier stage VC ecosystem can also benefit from future flows of retail capital into private markets.

Compelling historic returns (especially as companies are staying private longer) is one impetus for this drive to privates.

But the answer to “why now” is more a zeal for regulatory change than anything else. The US government is actively seeking to open up 401(k)s to crypto and private markets alike. The market is reacting accordingly.

These acquisitions lay the foundations for Wall Street to step up selling of private market products. The platforms provide data & relationships to deliver superior risk assessment and superior access to quality opportunities. In addition, these secondary platforms position Goldman & Morgan Stanley for any IPO business from these private companies.

There are still some major complications before the retail floodgates are fully open, particularly around valuations (as 401(k) participants seek daily NAVs) and liquidity (as the SEC fears retail investor capital being locked up for major life events).

Interestingly, the SEC’s advisory committee report in September recommended that indirect access, not direct access, should be the preferred mechanism for enabling private market access:

In the Committee’s view, the optimal way for retail investors to access private market assets is through registered funds, which allow retail investors to invest in broadly diversified funds that contain private market assets, often alongside public market assets. The investor protections embedded in the registered funds framework include Commission review, audited financials, professional fund management, diversification, various levels of liquidity, and the protections of the Investment Company Act. The Committee therefore recommends changes to Staff Interpretations and/or rules under the Investment Company Act of 1940 to allow registered funds to better facilitate investing in private market assets.

This echoed remarks by the SEC chairman, Paul Atkins, in May about how he wanted to reconsider the 15% limit on private market investments by closed-end funds.

It is therefore curious as to why the EquityZen & Forge Global acquisitions took place, given that each of these platforms is better known for direct access to the top ~50 unicorns than they are for delivering diversified fund products.

We can only assume that GS/MS/CS intend to leverage their access to direct companies from these acquisitions to then build new indirect products. The Charles Schwab CEO said as much on CNBC yesterday morning. Industry Ventures of course already has a well established indirect secondary business.

At the same time as these acquisitions, Destiny XYZ, a listed closed end fund focused on private markets, announced this week that they have an additional $70m of cash to deploy into pre-IPO unicorns. They continue to trade at a significant premium to NAV.

DXYZ is an example of broadening access to private markets, wrapped in a registered fund with liquidity via the public markets and regular valuation updates. This appears to be in-line with how the SEC is envisaging expanding retail private market exposure.

At SignalRank, we see these developments as positive.

SignalRank is investing at Series B in what we believe will be the household names of the future. We are backing earlier stage companies with higher growth profiles, which is reflected in our expected returns.

These platforms are therefore complementary to our approach, offering later stage access for investors to the highly sought after household names in the private market. Perhaps of greatest value to SignalRank is the broad market education that these platforms provide to retail investors about the opportunities within private markets.

They also provide much needed liquidity to existing investors in these companies. These secondary platforms can become partners of ours to acquire our annual matured cohorts after Year 5.

If we take a broader view about the flowing of retail capital into the private markets, SignalRank can act as an intermediary to support the channeling of retail capital into the earlier stage ecosystem. This has historically not been possible - a typical $50m seed fund is not usually available on retail platforms (due to size, track record and regulatory considerations).

A listed entity could attract retail capital at scale to direct into the highest quality Series Bs in a highly diversified risk-adjusted structure.

In sum, these recent acquisitions play to the broader theme of the democratization of alternatives. Wall Street institutions (& the SEC) now see VC as a serious component of any investment portfolio, even for retail investors. And, with SignalRank, retail investors can start to access earlier stages of the ecosystem.