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I sat down with Tom Callahan, CEO of Nasdaq Private Market, a secondary marketplace and liquidity provider for private company trading and transactions. NPM recently spun out of Nasdaq is now backed by a consortium of banks and financial institutions, including Nasdaq, Citi, Goldman, Morgan Stanley, and others.
In this episode, we discuss:
An update on the state of both primary and secondary activity in private markets
“2021 might as well be 100 years ago, because those valuations literally don't matter… [now] it's a sort of Jerry Maguire market, show me the money, they want to see revenue today, not a year, not in six months, not in two years.”
The private markets faced a tough period between June 2022 and June 2023. With aggressive repricing in public markets and uncertainty in private market valuations, which meant the secondary private market was essentially closed. Additionally, the collapse of Silicon Valley Bank in February 2023 further stalled the private markets, causing significant concerns for private companies, many of whom had their cash holdings with the bank. Tom shared that the private markets are showing signs of healing and recovery. After a nearly year-long closure of the market, we are seeing some significant public market recoveries, and large IPOs have been announced, signaling the gradual reopening of the IPO market.
Starting from mid-2023, there has been a resurgence of activity in the private markets, primarily driven by pent-up demand for liquidity from companies, employees, and VCs. Despite the challenges, there are positive signs: certain private market valuations are showing appreciation, and investors view the current environment as a great time to buy private secondaries at substantial discounts, drawing parallels to buying real estate post-GFC in 2009. However, there is a heightened focus on near-term revenue by investors, resulting in challenges for companies that can't showcase immediate financial results. The market sentiment has shifted towards practicality, with a demand for tangible and immediate financial outcomes.
A deep dive on how private markets work and why the system is so archaic
“In the private markets, settlement is a huge, huge risk factor. It takes on average, in the legacy market, about three months to settle a private market trade. So it's actually a lot like a residential real estate transaction. There's wet signatures, and Docusigns, and lawyers. It is like a real estate closing, which everyone knows it takes around three months.”
Private markets are central to global innovation - it’s where young innovative companies receive funding. Without proper funding, innovation can stagnate or perish, but the private markets designed to buy and sell equity of these companies are surprisingly archaic in their operations, reminiscent of financial systems from the early 20th century. Unlike public markets where one can easily check stock prices and trade equities for free, private markets have no standardized quoting system and operate with hefty commissions. While public markets efficiently consolidate trades with entities like the DTCC, ensuring trust and timely settlements, the private markets face significant settlement challenges. It typically takes about three months to settle a private market trade, making the process analogous to a residential real estate transaction with its inefficiencies, paperwork, and prolonged duration. Nasdaq Private Market addresses these inefficiencies head-on and has introduced services like settlement trading, aimed at streamlining and automating the process. This service reduces the settlement time to less than a week, providing 100% certainty and creating a foundational infrastructure to enhance the efficiency of the vast $3.5 trillion private market asset class.
Unintended consequences created by regulation like the US JOBS Act… and a lot more!
“There was an unintended consequence of the Jobs Act. The Jobs Act was really meant to fund Main Street, you know, dry cleaners and hardware stores, it wasn't really meant to create an epic bubble in private markets and to create 1,000 unicorns, but that's exactly what it did.”
Originally intended to fund smaller mom-and-pop businesses, the JOBS Act inadvertently led to a surge in private market growth, resulting in the creation of numerous unicorns. Some SEC chairs believe the act might have unintentionally introduced a loophole that needs addressing. As private companies grow and reach certain thresholds (whether in valuation, shareholder count, or systemic importance), there's increasingly a belief that companies should be required to provide basic financial disclosures. Under the current system, there's huge difference in transparency between public and private companies, leading to information asymmetry. While there are calls for increased transparency and regulation for large private companies, there's also caution about potentially stifling innovation. Tom argues that finding the right balance is crucial to ensuring private companies are held to some accountability standards without overwhelming them with onerous requirements.
NASDAQ PRIVATE MARKET, LLC IS NOT A REGISTERED EXCHANGE UNDER THE SECURITIES EXCHANGE ACT OF 1934. NASDAQ PRIVATE MARKET IS OPERATIONALLY INDEPENDENT AND DISTINCT FROM THE NASDAQ STOCK MARKET LLC. SECURITIES-RELATED SERVICES ARE OFFERED THROUGH NPM SECURITIES, LLC, A MEMBER OF FINRA AND SIPC. NONE OF THE INFORMATION PROVIDED REPRESENTS AN OFFER TO BUY OR SELL, OR THE SOLICITATION OF AN OFFER TO BUY OR SELL, ANY SECURITY, NOR DOES IT CONSTITUTE AN OFFER TO PROVIDE INVESTMENT ADVICE OR SERVICE. INVESTING IN PRIVATE COMPANY SECURITIES IS NOT SUITABLE FOR ALL INVESTORS. IT IS HIGHLY SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
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Miguel Armaza is Co-Founder & Managing General Partner of Gilgamesh Ventures, a seed-stage investment fund focused on fintech in the Americas. He also hosts and writes the Fintech Leaders podcast and newsletter.
Tom Callahan, CEO of Nasdaq Private Market – Transparency, Innovations, and Challenges… State of the $3.5 Trillion Private Markets in 2023