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Beyond the Golden Ticket: Unwrapping the Challenges of Private Markets



Introduction

In recent years, there has been a discernible shift towards private markets. Major financial powerhouses like Goldman Sachs, JP Morgan, UBS, and Citigroup have all established specialised teams dedicated to navigating these waters. However, beneath the surface of these burgeoning divisions lies a troubling reality: many lack the depth and expertise necessary to truly add value, functioning more as glorified sales forces than genuine conduits to complex investment opportunities.


The Rise of Access Platforms

Platforms such as Moonfare and Forge Global represent a burgeoning trend aimed at democratising access to private markets. By fractionalising investments, these platforms offer retail and HNW clients a previously unimaginable entry point into this elusive world. Similarly, numerous initiatives leveraging blockchain technology are working to transform private market investments into tradable digital assets. The common thread among these innovations is their focus on improving access. Yet, more than access is needed to address private market investments' underlying complexities and challenges.


Moonfare

Moonfare is one of the standout examples in this burgeoning field. It offers its clients the opportunity to invest in private equity funds with significantly lower minimum investment thresholds than are traditionally required. By doing so, Moonfare opens the door to top-tier private equity opportunities for individuals who previously needed help to meet the high entry costs. The platform says it will meticulously select funds based on its rigorous due diligence, ensuring that its offerings are not only accessible but also of high quality. 


Forge Global

Forge Global caters to a slightly different aspect of the private market by providing a marketplace for trading pre-IPO shares. This platform allows individuals to invest in companies on the cusp of going public but still in the private domain. Forge Global says it has created a unique niche by facilitating liquidity in a market segment known for its illiquidity, attracting investors looking for early-stage opportunities and shareholders seeking to unlock value before an IPO.


YieldStreet

YieldStreet takes a broader approach by offering access to alternative investments across various asset classes, including real estate, marine finance, legal finance, and art finance. The platform's mission is to provide investors with diversification opportunities outside of traditional stock and bond markets, focusing on assets that can generate passive income streams. YieldStreet's model is built to make alternative investments more accessible, with transparent structures and lower entry points.


Tokenisation and Blockchain

The rise of blockchain technology has introduced a novel dimension to private market investments: tokenisation. This process involves converting ownership of a physical or non-physical asset into a digital token on a blockchain, thereby making it easier to trade and divide among a larger pool of investors. Several startups and platforms are exploring tokenisation to fractionalise real estate, art, and even ownership stakes in private companies, making these investments more liquid and accessible.


The Underlying Complexities

Private market investments are inherently complex, with each deal being unique and requiring careful negotiation to secure the best terms. However, the actual test of skill and expertise arises during the entry into these markets rather than during the management and eventual exit from them. Changes in circumstances, unforeseen challenges, and deviations from the plan demand a rare combination of legal acumen and investment banking savvy—qualities in short supply across the industry.

Understanding these intricacies is crucial for investors contemplating this arena. Here, we explore the multifaceted nature of private market investments, shedding light on why managing and exiting these investments demands a unique blend of skills, experience, and tenacity.


1. Illiquidity and Long Investment Horizons

One of the most significant challenges in private markets is the illiquid nature of investments. Unlike public markets, where assets can be bought and sold relatively easily, private market investments typically require investors to commit capital for extended periods. This lack of liquidity necessitates thorough due diligence and a long-term perspective, as exiting an investment prematurely can be difficult and often comes at a cost.


2. Valuation Challenges

Valuing private market investments is more art than science. Without the constant pricing mechanisms provided by public exchanges, investors and managers must rely on periodic appraisals, comparable transactions, and future cash flow projections to estimate the value of their holdings. These methods introduce a degree of subjectivity and can result in significant discrepancies in valuation, impacting both performance measurement and exit strategies.


3. Complexity of Deal Structures

Private market transactions are known for their intricate deal structures, including earn-outs, vendor financing, and complex equity arrangements. Each deal is unique, often tailored to the specific circumstances of the business and the preferences of the investors and sellers. Navigating these structures requires a deep understanding of legal frameworks, financial modelling, and negotiation strategies.


4. Operational and Market Risks

Private market investments, especially in early-stage companies or niche sectors, are subject to high operational and market risk. These investments often hinge on the success of unproven business models, the execution capabilities of management teams, and the vagaries of market demand. The ability to assess and manage these risks, including conducting thorough due diligence and providing strategic oversight, is paramount.


5. Exit Strategy Complexity

Finally, executing a successful exit from a private market investment is a complex and critical challenge. Whether through a strategic sale, an initial public offering (IPO), or a secondary sale to another investor, crafting an exit strategy that maximises returns requires timing, market insight, and negotiation prowess. The process is fraught with uncertainties, from finding the right buyer to navigating market conditions and regulatory approvals.


Navigating the Terrain

The underlying complexities of private market investments underscore the need for specialised knowledge and expertise. Investors must be adept at identifying opportunities and skilled in managing the multifaceted challenges that arise throughout the investment lifecycle. This combination of legal acumen, financial expertise, strategic insight, and operational oversight is rare, making it a valuable commodity in the private markets.


As the private markets continue to evolve, the demand for professionals who can navigate these complexities will only grow. Understanding these intricacies is crucial for investors to make informed decisions and successfully navigate private market investments' potentially rewarding but challenging terrain.


Tales of Failure

The past three years have been littered with stories of failed companies that ventured into private markets without the requisite expertise or oversight. These cautionary tales underscore the risks associated with inadequate management and the dire consequences of being ill-prepared for the complexities of private market investments. An in-depth examination of these failures, complete with interviews and analysis, will reveal the pitfalls that await those who enter this arena without the necessary skills and knowledge.


The failures of WeWork, Theranos, Quibi, and Luckin Coffee provide essential insights into the complexities of private market investments. However, these are just a few examples from a broader narrative of high-profile disappointments. Here, we delve into four more tales of failure, each offering unique lessons on the pitfalls of private market investing.


1. Better.com: The Perils of Premature Scaling and Market Misjudgement

Better.com, a digital mortgage lending company, gained notoriety for its rapid growth, significant venture capital backing, and its CEO's controversial management practices, including a mass firing via Zoom call. The company faced challenges due to overaggressive expansion, a cooling housing market, and significant operational missteps. Better.com's struggles highlight the dangers of premature scaling and the importance of market timing and operational resilience.


2. Katerra: Disruption Gone Awry in Construction Tech

Katerra aimed to revolutionise the construction industry through technology-driven efficiencies, from design to renovation. Despite raising over $1 billion in funding, Katerra filed for bankruptcy in 2021. The company's failure can be attributed to overextension in multiple construction areas, underestimating the industry's complexity, and inability to deliver on its technology promises. Katerra's collapse is a caution against overambition and the need for deep industry knowledge.


3. Jawbone: A Tale of Innovation Outpaced by Competition

Jawbone, known for its Bluetooth speakers and fitness trackers, was valued at over $3 billion. However, it failed to keep pace with competitors like Fitbit and Apple and struggled with product development and supply chain issues. Jawbone's liquidation in 2017 underscores the critical importance of innovation, competitive differentiation, and the ability to navigate operational challenges in a fast-evolving market.


4. Powa Technologies: The High Stakes of Fintech Innovation

Powa Technologies was a London-based fintech company that offered mobile payment solutions. Valued at $2.7 billion, it declared bankruptcy in 2016 after failing to generate significant revenue or deliver on its technological promises. Powa's downfall illustrates the risks associated with high valuations based on future potential rather than current performance and the challenges inherent in the highly competitive fintech sector.


5. Fisker Automotive: The Roadblocks of Automotive Innovation

Fisker Automotive, a pioneer in electric vehicles, sought to rival Tesla with its luxury hybrid cars. Despite substantial hype and significant funding, Fisker faced insurmountable financial difficulties, product recalls, and battery supply issues, leading to its bankruptcy in 2013. Fisker's journey illustrates the perilous path of automotive innovation, highlighting the challenges of scaling production, maintaining quality, and managing supply chain dependencies in a highly capital-intensive industry.


6. Solyndra: The Shifting Sands of Renewable Energy

Solyndra, a manufacturer of innovative cylindrical solar panels, became a symbol of the volatile nature of the renewable energy sector. Despite receiving over $1 billion in private investment and significant federal loan guarantees, Solyndra filed for bankruptcy in 2011. The company's failure was attributed to the plummeting prices of competing solar technologies and a business model that couldn't adapt to rapid market changes, underscoring the importance of market adaptability and the risks of relying on government subsidies.


7. Blue Apron: The Challenges of Scaling Consumer Services

Blue Apron, once a meal kit delivery service leader, faced challenges as it attempted to scale in a highly competitive market. Despite a successful IPO in 2017, the company needed to work on operational inefficiencies, customer retention, and increasing competition from other meal kit companies and grocery delivery services. Blue Apron's difficulties highlight the challenges of scaling consumer services, maintaining a unique value proposition, and managing logistics in a market with low barriers to entry.


8. OneWeb: Navigating the Complexities of Space Internet Ventures

OneWeb aimed to provide global internet coverage through a constellation of satellites. Despite raising significant funding, OneWeb filed for bankruptcy in 2020, citing challenges in securing additional financing amidst the COVID-19 pandemic. The company's ambitious project underscores space ventures' complexities, high capital requirements, and the importance of securing sustained funding and navigating geopolitical and regulatory landscapes.


And let's not forget blockchain, which hoodwinked thousands of investors who were heard like sheep off a cliff. Examples include The DAO, launched in 2016, which raised over $150 million to create a decentralised venture capital fund but was compromised due to a smart contract vulnerability, leading to a significant loss of funds and resulting in the contentious hard fork of Ethereum. Tezos, with a record $232 million raised in its 2017 ICO, faced prolonged legal battles and governance disputes that delayed project development. However, it eventually launched, and its early turmoil served as a stark warning about internal governance risks. Bitconnect was labelled a scam, promised high returns through a lending model, and raised significant funds before collapsing in 2018 under regulatory scrutiny, marking one of the most notorious exits with substantial investor losses. Paragon Coin aimed to revolutionise the cannabis industry, raising $12 million in 2017, but fell afoul of SEC regulations for conducting an unregistered securities sale, leading to its downfall and significant losses for token holders. EOS, despite raising an unprecedented $4 billion in its year-long ICO ending in 2018, faced criticism for its centralised governance issues and has struggled to realise its ambitious goals, leading to disillusionment among investors and a decline in its market position, making it one of the most high-profile disappointments in the ICO era. Each of these cases underscores the risks inherent in the crypto sector, from regulatory non-compliance and internal disputes to outright fraud, highlighting the precarious nature of early-stage cryptocurrency investments.


The Regulatory Perspective

Regulators have a critical role to play in overseeing the burgeoning private markets. Yet, there is a growing concern that they are merely spectators to a potential disaster. The rapid expansion of access to these markets, coupled with the lack of depth in the teams managing these investments, presents a scenario where the interests of investors may need to be adequately protected. Regulatory bodies must intensify their scrutiny and take proactive measures to safeguard investors from the inherent risks.


A Call to Action

The allure of private markets is undeniable, offering the promise of substantial returns and diversification. However, the industry must confront the reality that more than access is required. There is an urgent need for a significant upgrade in talent and a shift in focus towards long-term sustainability over short-term profits. Only then can the industry avoid the real damage inflicted on its client base and ensure that private markets remain viable and safe investments.



1648 | Beyond Consulting

We help transform and future-proof financial firms. 1648 is at the forefront of today's rapidly evolving financial landscape, guiding wealth managers and fintech firms through discovery and transformational journeys. Our expertise ensures that these firms adapt to industry transformation and drive it forward by employing the most effective strategies and digital innovations. The future of wealth management becomes more transparent, intelligent, and resilient with 1648.


The strategies presented are thematic and do not constitute investment advice (or advice of any kind). No assurance can be given that the objectives of the investment above strategies will be achieved; the strategies involve risk (including, without limitation, illiquidity risk) and may incur a loss on some or all capital deployed. The opinions expressed, or indeed the information or assumptions that underpin them, may contain errors, mistakes, or omissions; no assurance or warranty can be made as to the accuracy or completeness of this information, and readers should not place any reliance on this content to execute investment decisions or for any other purpose. Readers accept full responsibility for using this content and are kindly requested to consult with their professional advisor before making any investment decision related to the same.


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