Investing in private companies and investing in public companies present two very different animals.
Investing in public companies provides a certain level of certainty for investors. The stocks you buy are typically easy to acquire and equally easy to divest from when you decide to do so. Companies have clearly defined accounting requirements and disclosure practices. On the whole, public markets are liquid and transparent.
Private markets tend to offer opportunities for much bigger returns, but at the cost of that liquidity and transparency. Private companies have much fewer controls on their reporting, and it may be extremely difficult to sell your equity at a fair price should you decide you want out.
But what if some of those benefits of public markets could be brought to private equity?
That’s the concept driving Gate Global Impact’s Vincent Molinari in his efforts to build an ATS platform for trading private equity that brings some of the best elements of public markets to private equity. Here’s Vincent speaking with Equities.com’s Chitra Nawbatt at the Nasdaq Marketsite in New York City in December of 2014:
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Simply raising capital in private markets is one thing, but creating a real capital market that maximizes benefits to both the companies and their early investors is something else.
“We call it capital formation versus just capital raising,” said Molinari, who testifed for the SEC on this subject on March 4. “So capital raising, [is] the act of raising capital. Capital formation is the ability to have data, information, and investor education as part of the process, and that speaks to investor protection. So when you put that on a marketplace that’s defined? You’ve already done that vetting.”
Private companies aren’t legally required to protect investors the way public companies are, but voluntarily offering up some of that investor protection can go a long way towards creating a stronger capital market that both helps company’s raise funds and gives investors better returns with less risk.
The second piece of that puzzle, though, is creating secondary liquidity, or the ability for investors to take the equity they purchase directly from these companies and then be able to sell it on a secondary market.
“We think that’s the bit of the real differentiator…with Gate Global impact, is that we allow for secondary trading or liquidity in these instruments,” said Molinari.
Gate Global Impact is looking to build a platform that can support the sort of active trading that helps bolster investor confidence in private companies.
“[Investors] can post for liquidity on our secondary platform,” said Molinari. “New investors can look at existing companies that have secondary transactions going on. So it’s not as liquid as a public market, but there’s less volatility, and we’re finding that, as a part of portfolio allocation, this is a great way to allocate some of your assets to something that’s somewhat liquid but also delivering good.”
Gate Global Impact creates a series of benchmarks that can help weed out some of the unsuitable investments and even provides guidance to those investors interested in using their investment capital to actually support companies that they’re ideologically aligned with.
On the whole, Molinari and Gate Global Impact are looking to produce a new vision of private markets that creates new opportunities and approaches for investors even as they’re building opportunities for growing young companies to raise the capital they so desperately need.
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