Monark Monthly July Edition

Good afternoon, and Happy Sunday. As I write this from our new apartment in Dumbo, Brooklyn, the strong sense of inevitable change is in the air. Over the past few months, it feels as if the alts space is getting a fresh look, as a number of traditional distribution platforms ( Charles Schwab , SoFi , Morgan Stanley Private Wealth Management ) have begun focusing on the massive potential of offering alts to their clients. 2024 has already laid the groundwork for what I expect to be a significant transformation in the way individual investors access the alts market going forward. As most of the finance ecosystem has been out on vacation for the month of July, not a lot of current events have taken place. As such, I thought we would take this month to focus on a unique trend in the alts market, the rise of Pre-IPO investments/marketplaces.??

As the number of points of access investors have to the alts market expands, and the investment process becomes more standardized, the focus shifts to what kinds of private assets will resonate the most with individual investors. In this month's edition of the Monark Monthly, I take a deep dive into the world of Pre-IPO secondaries and explain why we believe that this asset class has all the right factors to pave the way for individual investors to become more educated and willing buyers of alts. While many of today's Pre-IPO marketplaces face their own unique challenges, the successes and pitfalls of these marketplaces provide one of the best frameworks for understanding the flow of retail capital into private market offerings.?

Why Pre-IPO??

Pre-IPO investments are the perfect starting point for individual investors to access the alts market for a few reasons: (1) Brand recognition, (2) Available supply, (3) Accessibility at lower minimums. Individual self-directed investors are highly motivated to invest in assets with which they are familiar. Many of the largest Pre-IPO companies, (Space-X, OpenAI, xAI) have widely known brands that investors are comfortable with and want access to. The availability of supply is also an important factor for getting more investors access to the Pre-IPO markets. Macro forces, including the lack of IPO exit market and a slowdown in M&A activity means a lot of the existing shareholders in Pre-IPO companies have strong demand to access early liquidity. The pressure on the supply side for liquidity creates a forcing function that expands the amount of available supply for new investors. Lastly, the rise in popularity of SPVs as a means of access to private companies is helping investors get access at lower minimums. Depending on the fund structure used, private SPVs can fractionalize access by 1/100 (3c1), 1/250 (QVC) or 1/2000 (3c7), allowing investors to access these Pre-IPO companies at much lower minimums.?

Pre-IPO investments are helping individual investors understand the nuance in the investment process between public equities and private assets. Pre-IPO marketplaces like Forge, Augment, Hiive and NPM are great models for understanding what works and what doesn’t when it comes to syndicating private offerings to a broad base of individual investors. In addition, the recent creation of a number of private market indices, including the Hiive50, Augment Power 20 and Forge Private Market Index, provide a data layer on which new investment funds and index products can be built to provide diversified exposure to the Pre-IPO market. Led by the recent success of the Destiny (DXYZ) fund listing on the NYSE, I expect RIAs and asset managers to begin structuring their own registered funds that allow investors to actually invest in the index products being developed by Pre-IPO marketplaces. As more individual investors access Pre-IPO investments, a familiarity with the nuanced investment process for private SPVs may lead to a broader adoption by individual investors of other private asset classes.?

The Investment Process:?

When investing in a single asset private Pre-IPO SPV, the process generally goes something like this: (1) Platform allows accredited investors to submit Indications of Interest (IOIs) in order to understand how much demand their investors have for a particular investment. (2) Platform then secures an allocation, if they haven't secured one already, and structures an SPV that sits on the cap table of the Pre-IPO company, or feeds into another SPV on the cap table. (3) SPV fund interests are syndicated out to investors on the platform. (4) Investors read a PPM, Fund Prospectus and sign SPV sub-docs to secure their allocation in the fund. (5) Capital is called from investors, generally funded via ACH or Wire Transfer. (6) Investors can view their allocation in their portfolio and wait for a public exit or liquidity event to realize their returns. (7) If the platform allows it, investors can trade fund interests on the secondary market. Everything from primary subscription to tax documents has nuance in private markets. While platforms have done a great job of streamlining this process and making it more automated and efficient, the fact remains that this process is wildly different from investing in public markets, where investors can click a button and buy shares of a public equity, where money movement is handled by their brokerage platform and settlement feels instantaneous.???

The benefit of getting more investors comfortable with the Pre-IPO SPV syndication process goes beyond simply expanding the available capital base for issuers of Pre-IPO SPVs. In fact, getting investors used to a new investing process and behavior actually makes it easier for investors to get comfortable investing across other private asset classes, where the investment process may be quite similar. For example, the process of subscribing to a 3c1 fund that sits on the cap table of Space-X, or a 3c1 fund that serves as a feeder to a 40’Act Registered Private Equity Fund, is in fact, the same investment process. So, while the underlying asset is different, getting investors comfortable with the process of subscribing and wiring money helps clear one major hurdle in expanding access to other private asset classes like Real Estate, VC, or PE Funds.?

Challenges of Building a Pre-IPO Marketplace:

Many of the marketplaces currently providing access to Pre-IPO equities are facing challenges in the accuracy of their market data, trades failing, and gaining access to supply, much of which is caused by a lack of distribution scale. Generally speaking, most of the Pre-IPO platforms have built businesses in the direct-to-consumer market, acquiring investors as users on their platforms and providing a native investing experience. As I have talked about before, d2c customer acquisition in financial services is incredibly difficult to scale, and often requires hundreds of millions of dollars of capital to achieve. In the alts space in particular, where marketplaces are faced with customer acquisition challenges on both the demand and the supply side simultaneously, launching without established distribution makes scaling the business next to impossible without a ton of cash. In fact, many of the venture backed alternative investing platforms that launched d2c, have pivoted to focus more on b2b distribution through the RIA channel, Family Offices or to Institutional Investors.?

In order to subsidize the lack of scalable transaction revenue, a number of Pre-IPO marketplaces have begun allowing investors to submit non-binding IOIs, and sellers to submit non-binding asking prices for non-verified blocks of supply in order to generate monetizable market data. What this means is that a lot of the quoted bids and asks being broadcasted by the Pre-IPO marketplace platforms are unverified and unreliable. In financial services, reliability and trust in your platform is paramount. If I submit a bid or ask for an asset, my expectation is that the bid or ask I get matched with on the other side of the trade is real, but on many Pre-IPO marketplaces today, this is not the case. It makes sense why these platforms choose to publish this data, as it makes it seem like their platform is capable of placing a higher volume of transactions, but in reality, the broadcasted IOIs or bid/ask spreads are often smoke screens covering a much more nascent level of transaction volume.??

The real downside of not being able to distribute a high volume of investment products comes down to the lack of direct access to supply. If a platform is unable to consistently place a high volume of investment products, private companies are not going to be willing to provide cap table access to those platform SPVs, and even SPV syndicates or VC funds that sit on those companies' cap tables are unlikely to provide access to the platforms SPVs and investors. The result is that many of the listings that do show up on the d2c Pre-IPO platforms are either marked up in price by 30-50%, or in a multi-layer SPV structure that stacks fees on fees, resulting in diminished returns for the end investors.?

The name of the game: Established Distribution?

The success of Nasdaq Private Markets (NPM) highlights the benefit of tapping into existing distribution channels as a b2b intermediary. Different from many of its direct-to-consumer oriented competitors, NPM has built a consortium of private banks through which they syndicate down private company tender offers and secondary sales. In order to build trust with companies and get direct access to their cap tables and tender offerings, NPM needed to come to the table with an established distribution channel through which they could place a high volume of product. Ultimately, partnering with private banks was a brilliant way to immediately secure a high volume of reliable distribution, something many d2c platforms have yet to execute on.?

As a marketplace, the goal is to execute more transaction volume, attract higher quality supply, and collect more accurate market data. Locking up the demand side of the market as quickly as possible is the best way of achieving the scale required to do so. As Michael Sidgmore likes to say on Alts Goes Mainstream, Scale Begets Scale, which is certainly true in the Pre-IPO market. As NPM attracts a high quality of supply through their tender offer business, they become an attractive point of access for investors looking to access the asset class. However, without the initial distribution scale provided by the private banks, NPM would not have been in the position to facilitate private company tenders in the first place. Contrary to the belief of many investors in Silicon Valley, the “harder side” of the market in financial services is demand (distribution) not supply.???

Moving Beyond Pre-IPO?

As we look beyond the Pre-IPO market, which makes up a small slice of the overall investment volume in private markets, it is important to determine what will need to occur for individual investors to get comfortable accessing other private asset classes. Similar to Pre-IPO investing, we firmly believe that the same motivating factors will apply to other asset classes. Those factors being brand recognition, availability of supply, access points at lower minimums, and the ability to access liquidity.?

Brand recognition will build over time, as more alternative asset managers allocate resources to educate the individual investor market, which many have already started to do. However, educating such a broad ecosystem of investors will require both well-developed content, and channel partnerships with established client relationships (like brokerages) to broadcast that content. While the investment in education may seem like a big lift, many asset managers have already shown a willingness to invest in education, as evidenced by the push to educate financial advisors across the RIA channel. The availability of supply, access at lower minimums and liquidity all come from the adoption of new product structures and infrastructure to facilitate that transformation at scale. This will require both the creation of new investment products by alternative asset managers, as well as the existence of broad distribution networks to support fundraising capabilities and incentivize managers to structure more accessible and retail friendly products.?

As the points of access to alternative assets continue to expand for individual investors, we expect the power of distribution networks, brand recognition of private assets and the incentive alignment to create a more standardized industry, to drive an increasing amount of individual investor capital into private markets.?