Tag: private capital markets

How technology is transforming online capital formation?

Friday January 12, 2024

Technology in capital formation and its synonyms are topics that are receiving a lot of attention in these days. Not only because the technical advances and features transformed (and still transforming) the ways companies get capital to fund their business. Let’s talk more about it.

TABLE OF CONTENTS

What is the role of technology in capital formation?

It is no trade secret that technology has played a pivotal role in transforming everything – from business operations to consumer behavior. And capital formation is no exception to this rule. Capital formation is the net capital accumulation for an entity over an accounting period.

When you think of how technology supports the discovery or improvement of products and services or the process of creating the same, it becomes evident that it has close linkages with capital formation too. The correlation is that technology offers capital formation a boost.

On the other hand, economic progress also creates favorable conditions for the growth and consolidation of technology. As such, they form a win-win relationship that promotes overall development.

Technology’s impact on capital formation

Taking this into consideration, let’s delve into how technology is revolutionizing the process of raising capital online.

In the next topics, we will explore a practical framework regarding the different details that involve this subject.

On that note, here is a look at how technology is transforming online capital formation.

Artificial Intelligence

Artificial Intelligence, or AI, is a major catalyst in transforming online capital formation.  For starters, AI-powered engines can crunch high volumes of data to perform a 360-degree analysis of potential investment opportunities and personalize the results based on the investor’s goals.  Such AI-based data analysts can work with structured and unstructured data or identify patterns that human analysts could miss out on!

Similarly, AI frameworks can predict the estimated cost of capital and the corresponding revenue with nearly 100% accuracy. These predictions remain reliable as every variable is accounted for.

Automation

Just like AI, automation is disrupting online capital formation in more ways than one. In manufacturing, automation is the secret ingredient that injects efficiency into processes and increases production value.

For investors, it is the medium for seamless onboarding and document management. Pair it with deductive technology like AI/ML, and you will have a self-sustaining, automated platform to track and manage capital in real-time.

There’s just so much potential here.  By adopting automation the entire sector can operate with the assurance it is compliant with securities regulators and transparent with the entire ecosystem supporting online capital formation.

Digital securities

Digital securities or security tokens are blockchain-based financial instruments. They are the digitized form of traditional securities like stocks or bonds and are issued and traded on blockchain networks.

Despite such similarities, digital securities possess greater advantages than their traditional counterparts. They are far more transparent, efficient, and secure. At the same time, they also offer greater liquidity as they can be traded 24/7/365 on the global markets with great ease.

Digital Securities is important to have vibrant private capital markets.  Digital Securities allow the opportunity to instantly settle and validate where this process would take weeks and months.  

Digital Securities do need to be 100% compliant with the securities regulators if not then there is no value in placing any of the securities on a blockchain technology with the expectation that the investor will be able to transact.

Online Capital Formation Platforms

Online capital formation platforms are offering entrepreneurs the opportunity to connect with the global investor base. As such, it comes as no surprise that crowdfunding platforms have become insanely popular of late, especially since the entrepreneurial drive is currently at its peak.

 

In addition to granting entrepreneurs access to a larger pool of potential investors, crowdfunding platforms are also emerging as the medium for entrepreneurs to connect with experts. Thus, it is gradually eliminating any barriers for an excellent idea to gain wings.

Digital identity verification

Online capital formation hinges on digital identity verification to ensure that only credible investors gain access to the capital market. At the same time, it also helps establish the accreditation of investment opportunities.

As such, it can make use of specific identity markers to securely and reliably verify details.  There are millions of potential investors and if they do not have a passport that is fully compliant and verified by a regulated stakeholder, the friction these investors face will be the major barrier for online investing.

In conclusion

Within the sphere of online capital formation, technology stands as the essential backbone, seamlessly integrating transparency, security, efficiency, and accessibility.

Looking ahead, technology is poised to revolutionize online capital markets, democratizing access and reshaping the financial landscape. The synergy between innovation and online capital formation promises an interesting future. Where technology continues to empower investors, foster growth, and redefine financial possibilities.

 

What are the private capital markets in business

Wednesday January 10, 2024

Beyond the familiar world of financial headlines, a vast network of private companies fuels global growth. In this context, many people are researching the subject to understand What are the private capital markets in business.

Firstly, the private capital markets, operates under different rules and holds potential for investors and businesses alike. In today’s post, we’ll explore practical aspects regarding the inner workings of this hidden ecosystem, its challenges, and its future.

What are private capital markets in business

If you’re looking about What are private capital markets in business, there’s a simple way to explain it. Basically,  the private capital markets are a field of the financial system where investors provide funding to privately held companies, i.e. those not listed on public stock exchanges.

These companies can vary from start-ups to more established companies seeking to expand or restructure.

With its particularities and own regulations, the private capital markets are and dynamic ecosystem that plays an important role in the world economy. In the next section, we’ll talk more about this, contextualizing with public markets.

Public vs private markets

The financial world is broadly divided into two segments. Both segments contribute approximately 50% of the world’s GDP. That’s where the similarities end. These two segments are the public and private financial markets, and they are vastly different.

The public markets generate 95% of the noise and the news. They are generally very efficient, fluid, and well-served by technology. These are the financial institutions and companies that we read about and see daily on TV.  As of May, 2022, there are approximately 58,500 publicly listed companies on the planet. In all, these companies have a market capitalization of about $90 trillion. 

Public companies have been increasingly going private for over a decade, fueled by the costs of keeping a public profile and the requirements of Dodd-Frank and Basel III. A larger proportion of public capital is in the form of debt, with many companies implementing aggressive share buyback programs. This has also decreased the secondary market liquidity, while the illusion of liquidity is maintained by the approximately 70% of trades generated by algorithmic trading. The retail investor is increasingly underserverd in the public markets.

Compare all this with the approximately 285 million private companies, of which private equity invests barely $9 trillion. However, the trend is rapidly changing. Since 2009, more capital raising has been done by private companies than by public companies, sometimes by a factor of 2.

Insights on private capital markets

What is especially interesting about the rise of private markets is that the trend is changing despite the private markets not having any unifying central authority or even a regulatory consortium. Private markets are significantly underserved by technology. For many participants in the private markets, technology means moving from a physical Rolodex to an electronic one (mostly, a spreadsheet).

Traditional banks have evolved into institutions that make it easy to collect retail savings and funnel them into institutional investment firms or lending back to retail or SME customers. There has been no infrastructure for retail private investments or private capital raising over the last couple of hundred years. For this reason, the private markets remain fractured and fragmented. The participants include broker-dealers, CPAs, law firms, funding platforms, auditors, transfer agents, and various auxiliary service providers (such as for KYC screening, custody, escrow, payment processing, etc.). All of these participants exist to connect private companies seeking to raise capital with private retail investors.

Attitudinally, private market participants want to remain private. They want to retain their individual branding and serve their communities and niche markets. However, they see the potential for tapping into the wider retail market, even internationally. The challenge remains how to do it efficiently.

On the public side of the market, it is easy to conduct trades after the accounts have been set up with brokerages. Anyone with a smartphone can place a trade for a publicly listed company and get a trade confirmation within seconds (assuming high liquidity and that the markets are open). A similar trade with private shares takes several weeks.

Final thoughts

From all this, we can see that the private markets are on the rise and, with supportive forward-thinking legislation such as the JOBS Act, opening up participation by the retail investors in a much more direct way. Private markets are not only here to stay but increasingly becoming more democratized.

 

What is missing is an efficient infrastructure of trust. That is a topic for another blog.

What is the Private Capital Markets

Thursday December 15, 2022

What is the Private Capital Markets?

The private capital market is a vast market of investment opportunities and deals that often goes unnoticed compared to their much more visible public counterparts. While the private markets may not be as apparent to most, they offer an incredible array of opportunities for those willing and able to do the due diligence and research required to take advantage of them.

 

Growth in Private Capital Markets

The private capital markets, while seemingly more exclusive and less accessible than the public markets, are, in fact, a much larger market than their public counterparts. Private companies far outnumber publicly listed companies, with approximately 450 million private companies compared to only 100,000 publicly listed companies across the globe. This discrepancy results from fewer regulations and reporting requirements that come with private companies compared to public markets, meaning that many investors are willing to take on greater risk to gain greater returns.

In 2021, private US companies raised an estimated $3.9 trillion through private capital markets while only raising $1.2 trillion through publicly traded markets in the US. This clearly indicates the impressive potential within the private capital markets. Not to mention, the size of these markets is expected to double by 2027.

 

Who are the Participants in Private Capital Markets?

The private capital markets involve many participants and stakeholders with unique roles to play. With various regulations, laws, and rules that apply to the other participants, knowing who they are and their roles are essential when engaging in private capital markets. These include:

Broker-Dealers: Broker-dealers act as intermediaries between buyers and sellers of securities, typically on behalf of investors. They generally are licensed, regulated, and subject to oversight by governing bodies such as the Securities Exchange Commission (SEC) and FINRA.

Registered Funding Platforms: These platforms provide access to private capital markets for issuers and investors. Typically a platform registered with the SEC or other financial regulators, these platforms allow for securities transactions in the private capital markets.

Lawyers: Lawyers provide legal advice and expertise to the participants involved in the private capital markets, helping to ensure that all parties understand their rights and obligations regarding these markets.

Auditors: These are third-party accountants responsible for verifying companies’ financial statements in the private capital markets. As such, auditors provide an essential service when it comes to confidently engaging in these markets.

Transfer Agents: These companies act as intermediaries between buyers and sellers of securities while ensuring that the transfer of assets is done correctly and according to all applicable regulations.

Banks: Banks are licensed financial institutions that can hold companies’ funds while raising capital with broker-dealers or registered funding platforms.

Investors and Shareholders: These individuals or entities provide the funds for private investments in exchange for a share of the company, either through an equity stake or a debt instrument.

As the private capital markets continue to grow in importance and prominence, it is essential for those looking to participate in these markets to understand their roles, regulations, and best practices. By doing so, the market is compliant, secure, and prosperous. With increasingly accessible technology making significant advancements in allowing investors access to this market, the private capital markets are sure to only become more popular and accessible in the near future.

See the numbers?
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Private Companies

$4.5 trillion

Public Companies

$2.1 trillion

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