There is no shortage of predictions about how quickly and how significantly the secondaries market will grow. But one obstacle stands in the way of monster growth: a lack of technological remedies to simplify complex processes.
Significant upside awaits businesses that can develop these products. Nasdaq alone has been involved in three such ventures, teaming up with SharesPost (now Forge Global) in 2014 to create an online platform for trading limited partnership stakes, launching its own platform in 2017 and teaming up with PJT Partners in 2019 on a product geared toward GP-led deals.
While there’s no shortage of tech looking at the space, “you haven’t seen anything take hold because of the complexity,” says Sunaina Sinha Haldea, global head of private capital advisory at investment bank Raymond James.
Private markets represent a tensile structure of legal agreements. As such, the biggest roadblock to increasing the efficiency of secondaries trading is standardized legal and document frameworks, says Gerald Cooper, head of secondaries North America at adviser Campbell Lutyens.
“The process is really clunky,” says one secondaries buyer who has used a number of platforms. Each fund has its own purchase and sale agreement, disclosure requirements and transfer documents. Buyers and sellers, particularly state-backed pensions, often have specific reporting requirements.
Nasdaq in 2017 tried to standardize it so there would be one transfer document for all funds, but “it was so cumbersome, they couldn’t really pay it off from an execution standpoint,” the buyer says, adding there is a trade-off between efficiency through standardization and the ability to negotiate the fine details of a trade.
Even something as “simple” as valuation is quite laborious, notes Sinha Haldea. “You have to explain to your provider the nuts, guts and bolts of any transaction before they can underwrite a fairness opinion,” she says. “No part of the service-provider chain can be plug-and-play today.”
Of course, if these technologies do become viable, intermediaries will have to take a hard look at their own value proposition.
There have been some notable tech successes. Moonfare has come up with a way to ease the transfer of stakes on its own platform. In early 2021, the retail investment platform selected Lexington Partners as a designated buyer of stakes, with clients having the option to sell their fund stakes to the firm through a formal process held twice a year.
“We listened to the market, and illiquidity was one of the main concerns left standing between individual investors and allocations to private equity,” says Moonfare founder and chief executive Steffen Pauls.
His firm’s approach simplifies stake sales by reducing the number of variables. A system comprised of a fixed number of sellers, a finite number of funds and a single secondaries buyer means less variation in transfer restrictions, disclosure requirements and LPAs.
Automating even part of the bespoke and labor-intensive business of secondaries promises large untapped volume from institutional and retail markets. For now, however, tech developments are accretive rather than revolutionary.