Why doesn’t efficient liquidity already exist in private equity?
Well, isn’t that the multi-trillion dollar question.
Let’s explore — shall we?
What makes the public markets operate the way they do? If you click “sell” in your Robinhood account, that sale is immediately processed and settled in a couple of days. I’d say that’s pretty efficient.
It comes down to two things: transparency and systems.
Public companies are required to disclose certain information, so everyone has access to the information they need to make an informed investment decision (in theory). When companies list their stock to be traded on an exchange, they comply with both the SEC’s rules and the exchange’s rules, which build efficient systems for trading. All investors have access to the same information, and trades are processed based on these rules and standards. Basically, everyone is supposed to be playing the same game with the same rules. While not a perfect system, the public markets do offer great liquidity for most investors.
The two things that make the public markets work are the same two things that don’t exist in private equity.
With private companies, securities are exempt from registration with the SEC, and therefore, do not adhere to any standard practices regarding issuing or trading. In fact, most ownership of private stock is still tracked using excel. Yeah, let that sink in for a minute…EXCEL. So, if most ownership is tracked using excel, can you imagine what a massive burden it would be to trade those securities? Because there is no efficient system to trade this stock, investment documents have “transfer restrictions,” which are terms prohibiting the sale or transfer of private shares.
Here is just one example of the steps needed to liquidate private stock:
1) The investor wanting to sell would need to find a buyer.
2) They guess on the price because there is no market to do price discovery and no transparency.
3) The selling investor would need to call the CEO and indicate their interest to sell.
4) The CEO then needs to get Board approval for the transfer AND probably offer the same deal to all of the other investors.
5) IF the Board approves it and no other investors object to the deal (both of which would be highly unlikely) then everyone needs to call their attorneys.
6) The company’s attorneys would then have to draft transfer documents and a few other documents for shareholder approval.
7) In most cases, all other shareholders in the company would need to sign the docs and approve the transfer.
8) Then the buyer and seller would send the documents to their attorneys for review and execution.
9) Expect to spend $5k-$10k to do this deal, and that is on the cheap side. The seller would typically pay legal fees as they are initiating the deal.
10) Finally, the funds are transferred and the sale is recorded on…wait for it…EXCEL.
That means it took 10 expensive and time-consuming steps to execute one transaction.
Now, if that transaction is for millions — it might make sense. If it is for a small investment in a company for an early investor or an employee — it makes almost no sense.
Therefore, investors, shareholders and founders will hold private stock until a sale or liquidation of the entire company, which takes an average of 10 years…10 YEARS!!
The lack of liquidity is the main reason more investors don’t invest in private companies. Less investors means it’s harder for companies to raise money, and if companies can’t raise the money they need to get innovation to market, everyone suffers.
This is why we, here at LIQUIFI, set out to address this problem.
We wanted to make it so easy for a company to have a market to trade their stock that it just becomes a normal course of business. We want to decrease the holding period to help more investors feel comfortable investing in private companies. And as a result, we want life saving innovations to be capitalized enough to get to market.
Liquifi builds custom markets for trading private company stock. These markets are set-up and controlled by the companies. Once the rules of who can trade and under what terms are established, the markets are set to run.
Steps 2–10 we went through before for trading are done at the creation of the market, so once the market is established, it can just run.
Now, an investor wanting to sell just needs to place the order to be matched with a buyer. How liquid any one investment is will still depend on individual market conditions, but the fact that THERE IS A MARKET is the first step in the liquidity direction.
Welcome to the revolution.
