May 24, 2023
Chief Product Officer & Co-Founder
It is being talked about. It is said to be a trend. It will make billionaires, they said. It will change the face of the industry, they announced. And they’ve been saying it for some time: the democratization of private markets, the tokenization of assets.
The idea is as easy as captivating. Let’s make the commitment threshold much lower, so that the ‘average investor next door’ can participate in private market rallies. Instead of just a few large investors with multi-million dollar tickets, let’s open it up to tens of thousands of investors with tickets worth a few hundred dollars. And then the buzzword arrives: Let’s democratize private markets.
Several companies have started to build businesses around this concept already, some of them more successful than others. Especially in today’s rapidly changing market situation, where for example, pension funds make good returns from less risky investments such as bonds, and cash becomes less accessible than it was a few months ago. So as cash sources dry up more than private markets are used to, the idea of making investments available to all investor types becomes very interesting.
So, why has the democratization of private markets not happened? Why has the trend not taken off and remained a niche, if it’s even that?
In my opinion, there is one very important driving factor which halts the idea of democratization of private markets’ investments: the “private” in private markets.
The massive advantage of private markets is the principle that it is private. Any investment, any business interaction between parties in private markets is on an equal level. The interactions are regulated by agreements and not by regulation and standardization – each party is expected to understand what they are doing when signing such an agreement. Protection from a governmental body is not required, albeit for the basics, and no one in private markets wants too much attention from such a body.
But as soon as democratization is implemented, the average investor becomes involved, who has no idea how private market mechanics work, what the up- or downside is, and which term might put their investment at risk. At the point where an average investor loses their savings in such a fund, politics will get involved and governments will start to protect them with various regulations. The private market will no longer be private, and a new private market will emerge, where the cost of regulations and standardization need to be avoided once again. Why would any player in today’s private markets want to go that route? Especially, considering that democratization already exists - by banks who collect from average investors for feeder funds, investing into private markets, so that they can at least profit from the potential returns of private markets.
Gregor is an expert in waterfall calculations and distributions in the Private Markets sector. He has worked in various roles in the financial services sector, predominantly as product manager and IT leader. Gregor holds a Masters in Physics from the ETH in Zurich, an MBA from Rochester-Bern and a certification in Financial Modelling, Valuation and M&A from HHL Leipzig Graduate School of Management.
