Introducing Valuation as a Service

Executive Summary

The internet has been one of the most revolutionary and disruptive technologies in history, creating paradigm shifts across many industries. Included in this disruption was the digitization of the public markets in the 90s, which was driven from three principal factors. The first was transparency, or the ability for a much wider base of investors to analyze information and come to their own conclusions on how to properly price securities. The second was changes in pricing — which speaks to the demise of full-service brokers. Finally, greater access to information drove disintermediation, which again referred to the ability for investors to bypass old-school, full-service brokers and advisors for both information and trading of securities.

Over the last 30+ years, the public markets have continued to evolve along with new technologies that enhanced access to information and communication channels.

However, the mechanisms to commute trust and transparency into private markets have remained largely unchanged. As such, access to data, price discovery, liquidity, and secondary trading remain curtailed. Despite the slow rate of change in private markets, we have seen steady growth in terms of fundraising, which has accelerated over the last decade. Several factors can be attributed to the shift in investor sentiment globally, which will be addressed in this paper. This accelerating growth, along with emerging technologies such as blockchain and AI are set to transform private markets in a similar manner to the digitization of the public markets in the 90s.

The Growth of Private Markets

Global capital is currently undergoing a secular migration into private markets. In the 10 years prior to 2019, capital flowing into private assets grew at 4x the pace of public markets1. After a down year in 2020, private markets set a new all-time high in 2021 in terms of fundraising2. In total, private markets dwarf the size of public markets3:

Meanwhile, companies continue to stay private longer or are choosing to forego the public markets altogether. Of the companies that are opting to go public, a small percentage of them are producing net profits. In 2021, of the 123 tech IPOs, only 22% were profitable?. Furthermore, new legislation such as the 2012 JOBS Act allows for greater access to crowdfunding and greatly expands the number of companies that can offer stock without going through SEC registration. Finally, rising global debt paired with historically low interest rates have pushed investors into private markets in search of yield.

Aside from the data, the sea-change in private assets can be observed through the behavior of large asset managers and trading venues:

• Blackrock is now advising a 50/30/20 portfolio with 20% of capital going to alternative, private market assets
• JP Morgan is building a platform to match private companies with investors for fundraising as well as secondary trading
• The DTCC is building a platform to digitize and modernize private markets
• Bain & Company is advising that private markets will drive adoption of digital assets
• The London Stock Exchange is building a new platform for private company funding and secondary trading

The growing shift in sentiment toward private markets also has regulators adjusting their posture. This past February, the SEC proposed new reporting rules for private funds, citing the growth of private markets and systemic risks?. Private markets are clearly on the rise. But they still lack one key ingredient to unlock immense value for global economies.

Solving the Illiquid Nature of Private Markets

Liquidity refers to the ease with which an investor can convert an asset to cash or cash equivalents without impacting its value. The valuation of private market assets has historically been impaired due to their illiquid nature. In 2020, private market fundraising reached $2.9 trillion (2x public market funding), yet the private markets saw only $100 million of trading volume compared to $33 trillion in the public markets?.

Investors and service providers should anticipate the growth rate of private markets to accelerate even further this decade. Why? We now have the right technology mix through which we can enhance price discovery, liquidity, and the value of private market assets.

To see the future of private markets, we first need to look at the public markets. For the most part, public markets are highly liquid marketplaces for financial assets. Publicly traded assets such as stocks, bonds, and currencies change hands billions of times throughout a normal trading day. On top of these spot markets, we have well-formed global derivatives markets, including futures and options, that trade based upon the value of the underlying assets.

Investor capital has historically flooded public markets because of the liquidity available for these financial products. The sheer volume of investors expressing their opinions about these assets via bids and asks at any given moment makes it such that market participants can move in and out of positions with relative ease. As market conditions change, investors can easily pivot, hedge, and adjust portfolio positions. For these reasons, investors prefer liquid assets and price them as such.

But these well-formed, highly liquid public markets did not come about by accident. Trusted data is the essential base layer that allows these markets to function. Trusted data removes the asymmetry of information in markets. It allows market participants to converge on that which is true about the state of an asset. The standards and regulations that govern trusted data in public markets are largely set by the Securities and Exchange Commission (SEC) in the U.S. and ESMA in Europe.

Publicly traded companies face stringent rules and regulations around the disclosure of material information relating to their business.

In addition to filing quarterly and annual reports with the SEC, public companies must implement internal accounting controls and hire independent third-party auditors to review and sign off on their financial statements. The public uses this information to draw conclusions about the health of these businesses and express their opinions through various trading strategies. Their opinions about these assets rely on trusted data. This structure and the presence of trusted 3rd parties facilitates the formation of robust, liquid markets.

Because private markets lack this well-formed infrastructure around trusted data, price dislocations occur at a much higher rate than in public markets?. Private markets do not have a single oracle for trusted data, such as the SEC’s EDGAR database in public markets. This results in information asymmetry, lack of price discovery, and illiquid assets.

Enter blockchain technology.

Blockchains, at their most primitive level, are simply decentralized ledgers where everyone agrees on balances. These ledgers can be used to commute trust in the state of data and help establish the veracity of the performance of an asset. Furthermore, smart contracts create efficiencies that can automate capital table management, capital calls, distributions, investor notices, etc.

Using this new technology in conjunction with existing and improving technologies such as AI, we can now automate the recording of all the necessary information needed to price an asset. Pointers to these pricing inputs are then anchored to blockchain, generating an immutable audit trail.

Finally, asset owners, managers, GPs, etc. can now control their own data — and the data credentialing can occur in an automated fashion. Permissioned access to evergreen valuation data can be made by the asset owner, manager, GP, etc. Utilizing trusted, 3rd party fair value marks, this valuation data anchored to blockchain and held in client systems becomes the trusted, distributed EDGAR database for private market assets.

Valuation as a Service (VaaS) Powered by Inveniam

It all starts with better data. Valuation as a Service powered by Inveniam leverages new and improving technologies such as blockchain and AI to activate private market data.

VaaS allows asset owners, managers, GPs, etc. to streamline the valuation process utilizing better technologies and 3rd party fair value marks.

The process:

1. Onboard the asset or fund to Inveniam.io and set up the deal.
2. Connect to a federated data room — the client data stays within their systems.
3. Upload valuation documents using Inveniam’s automated workflows and data operating system.
4. Anchor valuation documents to the blockchain — this creates a “golden copy” of the data and establishes a trail, or provenance for the data used in the valuation. Users are automatically notified if any changes are made to underlying data.
5. Extract data from disparate sources (using AI) and deliver this clean data to 3rd party valuation agents — Cushman & Wakefield, JLL, Houlihan Lokey, ValuStrat, CBRE, etc. This creates demonstrable efficiencies for valuation agents.
6. The valuation agent receives permissioned access to the client-controlled data room, provides the 3rd party fair value mark, and a valuation summary is generated.
7. Auditable, click-through valuation summaries are created and anchored to a blockchain.
8. Permissioned access to the valuation data is granted to third parties as needed.

The Benefits for General Partners

General Partners can benefit from Valuation as a Service in a number of ways:

1. Receive independent, 3rd party fair value marks on a monthly or quarterly basis. This enhances transparency and trust for Limited Partners.
2. Keep your performance data evergreen, organized, and up to date at all times.
3. Control your data and allow permissioned access to it as needed.
4. Maintain “sale ready” assets and significantly reduce the typical 3–6-month due diligence process when taking an asset to market.
5. Offer private marketplaces to trade LP interests.
6. Improve accounting treatments by making all data points observable.
7. Enhance financing terms by making the assets more liquid.
8. Be fully prepared for any regulatory changes pertaining to reporting requirements.
9. Prepare your assets for seamless tokenization and the benefits of digital assets including superior settlement & custody, capital table management, access to global markets, and the efficiencies created by smart contracts.

The Benefits for Limited Partners

Limited Partners receive additional benefits:

1. Enhanced trust due to transparency of data and 3rd party fair value marks.
2. Unlock value due to enhanced price discovery.
3. Potential to trade interests in secondary markets.

Why Now?

Private markets are on the cusp of an evolution that will ultimately look like the digitization of public markets in the 90s. New technologies such as blockchain and AI are driving this change. Limited Partners will demand liquidity and secondary trading in the not-too-distant future. Tokenization, paired with better data delivered via products like Valuation as a Service will ultimately drive these disruptive changes to private markets. These new technologies will create greater access to information, efficiencies leading to disintermediation, broader sets of investors, unlocked value, velocity, liquidity, and secondary trading. Asset owners, managers, and investors can get ahead of this wave of disruption today by starting with Valuation as a Service, powered by Inveniam. Why wait? The time to act is now.

Contact Inveniam for more information.

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