When we started iownit 3 years ago, my co-founder and I had a simple vision we both agreed on – private securities markets were ripe for a technology-driven evolution.
What are private securities? Broadly speaking these are investments in private companies or private funds that are not registered with the Securities and Exchange Commission.
We each had over 20 years of experience in capital markets, having worked for some of the largest financial services institutions in the US and Europe. Looking back, it was clear to both of us that during our careers, significant parts of the capital markets were transformed radically with technology. In fact, it was not that long ago that traders were still placing their trades on paper tickets at most financial institutions. However, we saw that a major part of the capital market – the $2.9 trillion private securities market– was virtually unchanged despite its enormous size.
After a few weeks of intense deliberations, Hamid and I decided that there was a need and opportunity to help the private securities market evolve. The big question was, how do we go about bringing our vision to life?
As the business idea of iownit developed, we realized that the one major difference between private and public markets was the market participants’ philosophical approach to committing capital. While both public and private markets are ultimately about buying shares in a business you believe can provide appropriate returns for your investment, in private markets everyone was talking about “deals” whereas in public markets everyone was focused on “investments”. This is a fundamental difference.
Deal-making is difficult, it requires long and complex negotiations. There is extensive due diligence, and it consumes a lot of effort and resources from all involved parties. Yes, deal-making often sounds glamorous, and that impacts how we all perceive participation in a deal.
Everyone wants to talk about that great “deal” that they got in on. There is a perception that if you “got in” on a deal then you are in a privileged position in society. Because every deal is unique and is assessed on its own, there is little room for standardization or cost-reducing efficiencies. It’s actually the opposite.
Deal-making justifies high costs and fees paid to the intermediaries because of the complexities involved with completing a deal. These deals are long-term commitments, expected to last many years or even decades. Given the complexity and involvement of private deals entail, the amounts of capital investors contribute tend to be large and material. This high investment threshold also influences return expectations, which tend to be very high in order to justify the effort that goes into making a deal.
Investing on the other hand is a fundamentally different approach to committing capital. Investing is about a balanced portfolio, diversification, hedging against market swings, and liquidity. We have all heard about the need to have a broadly diversified portfolio that is seamlessly rebalanced as our needs change. We invest based on our broad life goals such as retirement planning, education of our kids, philanthropy, etc. We invest in stocks, bonds, ETFs, real estate and other financial products. We focus on sectors and talk about value vs growth vs income. We do not think of investing in a company through our brokerage account as deal-making.
So which approach is better for private markets? Deal-making, or investing?
The answer to that question will determine whether we need to focus our attention on – improving deal-flow or streamlining the investment process. In either case, we must think about leveraging technology to improve private securities markets and investor access.
Our big, bold bet at iownit is that we needed to focus on “investing” rather than “deal-making”. For us investing in the private markets has to be more like investing in public markets. Private securities should be considered a part of a diversified investment portfolio, be more liquid, simple to transact and easy to monitor. These are the solutions that the iownit platform provides.
Investing in private securities has its own unique set of challenges. There is not as much information, it is a much bigger universe of comparable investment opportunities, there are higher risks, and wider spreads in the secondary markets. If history teaches us anything, technology is one of the greatest drivers of change. After all, just a couple of decades ago investing in public securities was costly, there was not as much information available, and the spreads were wide. Thankfully, today the public markets in the US have become extremely efficient, mostly thanks to technology.
Our team is focused on eliminating the operational inefficiencies keeping private securities markets from becoming more efficient, and we will continue to thoughtfully leverage technology to achieve this goal.
Securities are offered by IOI Capital and Markets, LLC, member FINRA/SIPC. IOI Capital and Markets, LLC, is a wholly-owned subsidiary of Iownit Capital and Markets, Inc.