In todayās Weekend Edition, weāre going to be talking about some stories you havenāt heard:
- The new realities in Private Markets (hint: itās retail investors)
- The secret behind Kim Kardashianās $1b Buyout Pitch (hint: itās retail investors)
- The 15 new bills headed for Congress that could change private capital markets forever (hint: it’s about retail investors)
Letās dive in,
-Equifund Publishing
Private Capital Secondaries Collapse
Last week, we posted our first ever āScoreboardā segment, highlighting real estate outperforming PE/VC (see below).
But thereās another private capital strategy in the red right now that we want to bring light to: Secondaries.
What are Secondaries? To answer the question, weāll quickly cover what the terms āPrimary Marketā and āSecondary Marketā describe.
When you are shopping in the Primary Market, this means you are purchasing your investment directly from the company raising capital (called the āIssuerā).
When you are shopping in the Secondary Market, this means you are purchasing your investment āsecond handā from an existing investor (or Broker Dealer).
Technically speaking, the Public Stock Market is a secondary market; shares are traded between investors, not purchased directly from the company.
However, the Private Secondary Market, where investors can trade their interests in private companies or funds ā called Secondaries ā is far more complex to navigate than the stock market.
āThe main catalyst for the ascension of the private secondary market is simple: venture capital-backed companies have remained private for longer periods of time.
Since the early 2000s, the private secondary market has been dominated by a small handful of large private players, companies like Twitter, Facebook, Spotify, Uber, and Airbnb.
Recently, the market for private secondary markets has exploded, with shareholders at hundreds of large and private companies seeking liquidity.ā
How are they doing today? For that, we turn to Hiive Marketās May 2023 Market Report
āDuring the month of April, private markets first rebounded somewhat from the SVB crisis, and then resumed a gradual downtrend that has now persisted for many months.
The median bid reached a new low for the present downturn of a 61.1% discount to last primary funding valuation, compared with 58.7% in March and 51.7% in February.
While buyers got more pessimistic, sellers became more motivated, and the average asking price also reached a new low of a 34.7% discount to last primary funding valuation, down from 33.2% in March and 30.4% in February.
Private markets continued to diverge from public markets, as the average discount at which transactions were agreed upon on the Hiive platform reached a new high of a 42% discount during the month.ā
While many investors incorrectly assume that public market volatility doesnāt impact private market valuations, itās more accurate to say āprivate fund managers are less likely to mark down assets unless they absolutely have to.ā
In the previous Era of Easy Money, the easiest way to protect a company from a down round was to raise debt capital.
Nearly one in five venture rounds raised in Q1 came at a lower valuation than the companyās previous round. That figure is 3.6x higher than a year ago, and itās far and away the highest rate of the past five years.
Why? Because the moment you raise equity capital, there is now āPrice Discoveryā of what your equity is really worth.
This meant as long as you didnāt raise a priced round, you could reasonably pretend like the valuation didnāt collapse.
But what happens when shares are trading on Secondaries? And trading at a discount to your last round?
Scoreboard saysā¦ OUCH!
Bad news for anyone holding these bags looking to unload their shares (like Tiger Global)ā¦
But great news for investors looking to scoop up potentially discounted assets.
Gameboard
Growth of Retail in Private Markets
With the majority of institutional capital locked up in private fund commitments for the next few years, the world’s largest private market managers have moved deeper into retail channelsāincluding Blackstone’s contentious Real Estate Income Trust (BREIT).
According to PitchBook’s Q4 2022 US Public PE Roundup
āMost public alt managers highlighted early and often the importance of retail to the growth plans of their firms.
Simply stated, with the institutional fundraising market becoming more crowded, the wealth management channel is key to sustaining strong future inflows and AUM growth.
Public alt managers are still seeing healthy streams of capital from retail, with several managers stating the goal of this channel is to comprise 30% to 50% of total inflows.ā
What types of Private Capital Strategies are they focused on?
Not surprisingly, many firms view real estate as the most appropriate asset class for retail investors.
However, as weāve already highlighted in our discussion of the BREIT redemption issues, thereās clearly a lot to work out before retail products are ready for prime time.
Thatās why institutional investors, governments, and regulators have launched various initiatives aimed at dealing with many of the issues plaguing private markets ā transparency, liquidity, and retail access (which hopefully includes investor protection).
But even with the challenges, retail investors still want exposure to the private markets, as they search for greater returns, income, and diversification.
According to Blackstoneās latest āAdvisor Trends in Private Marketsā survey, financial advisors credited private market investments for delivering on their promise of greater diversification and lower volatility, especially at a challenging time for public stock and bond markets.
A majority indicated that they raised allocations to alternatives during 2022āand said they expect to keep doing so.
For Joan Solotar, Head of Blackstoneās Private Wealth Solutions division, the results support her long-standing view that more private wealth advisors should rethink their approach.
āI actually dislike the term āalternatives.ā I think of them as private investments, asset classes that belong inside investorsā core portfoliosāright there with stocks and bonds.ā
In 2022, those who thought bonds would help insulate returns in a bear marketāthe way they did in 2008āfound out the hard way that thatās not always the case.
According to Solotar
āPublic markets make up barely 10% of the economy, and they are at the mercy of persistent volatility.
But private assets, like real estate, private credit and private equityāwhile not immune, can help investors build value and add diversification over the longer term, we would argue, which can make them useful in balancing a portfolio and compounding returns year after year, as youāre working to build wealth.ā
Weāve said it before, and weāll say it again. Wall Street is coming for retail money with the alluring promise of ājust add alts!ā
Chances are, these products are going to be loaded with fees and redemption restrictionsā¦
And chances are, you arenāt familiar with how this type of product is structured (or the potential impact these structures have on your returns).
While we canāt offer any advice or recommendations for any of these forthcoming retail focused productsā¦
The whole purpose of the Private Capital Insider is to arm you with the knowledge of how these types of investment products work so you can have more confidence in your investment decisions.
With that said, are you planning on increasing your asset allocation towards alternatives?
Players
SKKY’s the Limit: Kim Kardashianās Entry into the Private Equity Space
Welcome to the exciting intersection of celebrity and finance, where we are served our latest entrĆ©e: SKKY Partners, Kim Kardashian’s debut private equity firm.
Yes, that Kim Kardashian ā the reality TV icon, fashion mogul, and aspiring lawyer.
The firm aims to raise an ambitious $1 billion in what can only be described as a challenging fundraising environment.
The unique selling point? Kardashian’s colossal social media following. With 432 million followers across Instagram, Twitter, and TikTok, Kardashian has, as the pitch suggests, a “demonstrated ability to identify and define culture.”
Apparently undeterred by the recent $1.26m settlement with the SEC for failing to disclose that she was paid $250,000 to post about EMAX tokens on her Instagram accountā¦
SKKY intends to turn Kardashianās fame into a viable investment strategy, banking on her status as a “cultural icon,” and her previous entrepreneurial success ā her shapewear company, Skims, which was valued at $3.2 billion last year.
Moreover, they intend to utilize the broader network of celebrities and influencers in their bid for “cultural relevance,” as well as harvesting insights from social media, to gauge consumers’ attitudes towards brands.
Kardashian ā along with former Carlyle Group executive Jay Sammons ā is aiming for 10-12 investments in e-commerce, luxury brands, consumer products and hospitality. These investments would each range anywhere from $100 million to $500 million of equity.
Want to participate? All you need is a minimum $10m commitment to get your seat at the table.
But seeing as how even industry behemoths like Apollo Global Management and Carlyle are struggling to keep up the fundraising paceā¦
Itās anyoneās guess whether or not the fund can succeed in translating Kardashian’s cultural relevance into fundraising financial prowess.
But, one thing is for sure: in an era where financial markets are starting to look like a red-carpet event ā and increasingly more āRetail-izedā ā I wouldnāt be so quick to bet against Kardashian (also, thereās no way to short the fund, so I couldnāt even if I wanted to).
What are your thoughts on celebrity involvement in investments?
Rule Changes
A New Era of Private Markets? Three Bills Stir Up The House
In a burst of legislative fervor, the U.S. House Financial Services Committee has given its seal of approval to 15 pieces of legislation.
All with one common mission: to pry open the gates of capital access for burgeoning companies, and lure middle- and late-market companies back into the public market fold.
While itās anyoneās guess which bills will make it into the broader āJOBS Act 4.0ā collection of laws, hereās a quick look at the bills headed for Capitol Hill.
Bill One: The Expanding Access to Capital Act (H.R. 2799)
Despite some opposition, H.R. 2799 made it to the approved list, pledging a significant upgrade to Regulation A+.
How? By turbo-charging the maximum offering amount from $75M to a whopping $150M per year.
If enacted, it would be a seismic shift for Reg A+ and equity crowdfunding, making the exemption far more attractive to larger companies with hefty capital appetites.
H.R. 2799 also proposes a get-out-of-jail-free card for some low-revenue companies, allowing them to court accredited investors sans the tedious SEC registration process. In a nutshell, it’s about making capital more accessible, and plentiful, for small and medium-sized businesses.
Bill Two: The Accredited Investor Definition Review Act (H.R. 1579)
This proposal seeks to revamp the definition of “accredited investor,ā creating a larger pool of individuals eligible to invest in private securities offerings.
The SEC has long insisted that accredited investors in private securities maintain a certain level of wealth. Current thresholds require that an accredited investor either earn $200,000 in individual annual income ($300,000 if married, filing jointly) or have at least $1,000,000 in net worth, excluding the value of a primary residence.
However, these same thresholds have been in place since 1982, and have not been adjusted for inflation.
The weird end result? Thanks to inflation, the pool of accredited investors has been dramatically expanded since the income and asset thresholds were adopted in 1982.
As shown by Figure 1, 18.14 million households or 13.85 percent of US households in 2020 met one of the tests for accredited investorsāas compared to 1.51 million households or 1.8 percent of US households in 1983.
However, many entrepreneurs and venture capitalists have argued that the current accreditation rules aren’t just a pain in the neck ā they’re a social injustice.
As Opportunity Hub CEO Rodney Sampson quipped, āI donāt see a lot of legislation blocking people from buying Yeezys or going to Vegas. I think you should be able to invest in your frat brotherās business.ā
If H.R. 1579 gets the green light, the SEC will need to revise the accredited investor definition every five years, bringing financial sophistication factors into the mix.
The hope? Gradually widen the definition to include more financially savvy individuals who don’t necessarily fall into the Richie Rich category.
Bill Three: The Middle Market IPO Underwriting Cost Act (H.R. 2812)
In Q1 2023, U.S. IPOs hit a decade low, with just 86 brave companies taking the plunge. Understandable, considering the financial world feels like an episode of “Stranger Things,” with inflation, a banking crisis, and dismal stock market performance.
However, this IPO inertia isn’t just a byproduct of economic conditions, it’s a trend that’s been worrying Wall Street for a while. H.R. 2812 aims to address this by directing the SEC and FINRA to take a magnifying glass to the costs faced by small- and medium-sized companies going public.
The objective? Identify these costs, assess their impact, and report findings and recommendations to Congress.
What’s next?
These 15 bills have won the first battle, but the war is far from over. As we all remember from Schoolhouse Rock, thereās still a way to go before bills become law.
In order for that to happen, all of the following steps still need to take place:
- The bills must be debated and voted on by the House, and need to win at least a simple majority (218 of 435 votes);
- Theyāll then move to the Senate, which will assign the bills to a committee;
- The committee will review, and potentially revise the bills before deciding whether to send them to the Senate floor for a vote;
- If the bills win a majority vote in the Senate, they will be sent to the President;
- And the President must sign the bill into law (or do nothing, in which case the bill becomes law automatically after 10 days).
With that said, expanding retail access seems to be one of the few issues both sides of the aisle can get behind.
Weāll keep you updated as the story develops.
