How essential are Secondary Private Equity platforms in Asia?

The growth in private market investment has accelerated in recent years with global venture investments topping USD600 billion for the first time in 2021, with US venture backed companies taking up USD329.6 billion of the total. Traditionally, private capital markets weren’t as deep and companies required capital to scale. The rise of technology companies that are able to scale without marginal capital and deeper private markets has meant that companies are staying private longer. This backed up but Industry Ventures’ research:

These trends have made it challenging to access liquidity without the transition to public markets, especially for employees and early investors. For many employees, much of their wealth is locked up in illiquid equity. It has also pushed many investors to seek out alternative ways to gain exposure to high-growth private companies. This creates an increased need for a private market for secondary transactions?– employees and early investors want to monetise their equity and later stage investors want to access investment opportunities.

Based on Carta’s liquidity report, its private market liquidity platform has seen a rapid rise in the cumulative secondary transaction, especially in 2021.

With the market for secondary liquidity in private companies booming, we are seeing more companies gear towards these trends by providing a secondary private market liquidity platform to capture this trend. To give an overview of the sector, the following explores some of the companies that are providing or looking to provide a secondary private market liquidity platform.

?

Secondary Private Market Liquidity Platform Providers

Interestingly, many of the emerging secondary market liquidity platform providers did not initially started as one but has branched out to this service recently. Most notably, many started life as cap table management platforms ?and subsequently bridged into the secondary market in search of monetising their core competencies (a deep understanding of the owners of illiquid equity) through their existing client base. The following image and list categorises some these companies based on their go-to-market strategy.

Cap table management software with secondary private market solution

Carta / CartaX:

Based in the US, Carta is a leader in the cap table and equity management software and works with over 30,000 companies. It has recently parlayed into the secondary private market liquidity platform service.

It acts as a private stock market with a suite of customizable solutions to help founders and C-suite leaders provide their employees and early investors an opportunity to realize the power of equity before an exit. For example, it can help companies with the option to offer liquidity as part of an employee benefit and customize their transaction framework. The company is currently valued over USD7bn.

Qapita:

Based in India and Singapore, Qapita provides cap table management software that automates workflows around the equity management process for cap tables, ESOPs, due-diligence, and transactions.

It works with over 1,000 clients globally and is currently building towards Qapita-Marketplace, where investors and employees can trade secondary shares in high-growth private firms across Southeast Asia and India.

Crowdfunding platform with secondary private market solution

Equitise:

Based in Australia and New Zealand, Equitise is a leading equity crowdfunding platform for unlisted companies to raise capital and manage investors. It allows retail investor and accredited investors to invest in early-stage private companies with a minimum sum of AUD50 to AUD5k, respectively.

Equitise is currently looking to diversify their services by introducing secondary market and registry services to help early investors exit their investments.

?

Secondary private market platforms

Nasdaq Private Market (NPM):

Previously known as SecondaryMarket Solutions before being acquired by NASDAQ in a joint venture with SharesPost, it is the largest US secondary private market with over USD50bn of transactional volume since its inception in 2013. It has served over 100,00 shareholders for many of the world’s largest private companies.

The platform enables brokers, investors and employees to access, manage and trade private company stock transactions via their global marketplace and technology solutions. It also support tender offers, auctions, block trades and pre-direct listing continuous trading.

?

InvestX:

Based in US and Canada, InvestX is a sell-side marketplace that provides access and liquidity in late-stage private equity and empowers broker-dealers to invest in pre-IPO companies. InvestX primarily serves three groups of clients which are the sell-side, shareholders (institutional investors and employees holding private company shares) and private companies where they invest through primary and secondary rounds. ?

EquityZen:

Founded in 2013 and based in the US, EquityZen is an online global marketplace for trading pre-IPO employee shares, allowing employee shareholders in private companies to make their equity available to outside investors. EquityZen usually works with companies that have already raised capital from institutional investors.

Forge Global:

Forge Global is the first global marketplace for private shares in Europe. Forge Global works with Deutsche B?rse and other partners to provide liquidity programs for companies and a digital marketplace that brings together buyers and sellers of pre-IPO shares. It serves over 440k investors and shareholders with over USD12bn of transactional volume.

The Elephant:

The Elephant is based in Israel and focuses on private tech companies globally. It has operated in the secondary marketplace since 2015 and manages a global platform with a portfolio of private shares in pre-IPO companies that are offered for sale by private shareholders on its platform. The Elephant also provide liquidity programs for companies to streamline the process of collecting participant interest and document signing.

The platform’s target audience is primarily smaller investors and shareholders and works in collaboration leading professional ecosystem. The Elephant is also looking to tokenize participation units to create higher liquidity in the secondary private market.

Southeast Asia “Unripe” for Secondary Private Market

As we have observed from the list of companies that are venturing or have been providing secondary private transactions, many of the largest and fastest growing platforms originates outside of Asia, with most of the transactions primarily happening within US-based equities. This could be traced back to the fact that private secondary markets have been relatively active in the US since the early 2000s with the establishment of secondary private markets such as SecondMarket. The ecosystem has matured since, and with companies staying private longer, the larger pool of ESOPs in the US has fuelled the US private secondary markets.

It is not surprising to see that private exchanges have not quite caught on in Southeast Asia yet compared to the US. Based on Carta’s database, employee ownership in a company in Asia is over 40% lower than in the US. Based on a survey done by Svested, 2 out of 5 start-ups in Southeast Asia do not use ESOPs. ?A number of founders that we talk to acknowledge that ESOPs and equity in early stage companies isn’t something that early employees are interested in. A majority of the time when give a choice between equity or additional cash, the employees will take the additional cash.

Presently, there is less need for the employees in Southeast Asia to access liquidity in secondary private market. This will change as employees become more savvy and see the wealth that can be created through ESOPs.

Opening Up secondary Private Market Liquidity in Southeast Asia

As more start-ups emerge in Southeast Asia, ESOPs and other types of equity compensation should become more commonplace, which will instil the demand for secondary liquidity. Overtime, we expect employees to be better educated about equity compensation and the implications that come from holding on to illiquid equity. This will potentially lead to higher demand for liquidity programs (usually facilitated by an equity management platform like Carta or Qapita) and employers will need to be able to offer several liquidity options to attract talent.

Venture capital funds are also flowing into Southeast Asia at a record pace but with more companies staying private longer, venture markets might need a mechanism to realise their illiquid assets. The potential arising need for secondary liquidity could open up opportunities for secondary market liquidity platform to bring value to the private markets in Southeast Asia.