Public & Private Markets Compared and Re-Imagined Through a Blockchain Lens

Most individuals are familiar with public markets - buying and trading shares of public company stock, ETFs and mutual funds. Private markets are perhaps less familiar to many of us. In this article, we'll cover private and public markets, how they compare and how we can expect them to function with the addition of blockchain technology.

Participation in the private market has historically been reserved for wealthy investors who meet certain minimum net worth thresholds. Employees of private companies also often receive incentives such as stock options. Though aside from those two groups, most investors have otherwise been excluded from what some consider to be one of the more attractive asset classes, a class of asset that has historically outpaced the S&P 500.

In more recent years, the ability for broader investors types to participate has improved thanks to legislation such as the Jobs Act. These new forms of legislation have allowed the potential for greater access for more investor types, including retail who can now participate in Regulation CF and Regulation A fundraises. Comparatively, the public market has been accessible to a broader investor audience including retail, with further limitations to access and trade.

When it comes to market size, public markets account for $1.4 trillion in primary capital raised while private markets account for over double that, weighing in with $2.9 trillion in capital raised. Historically, private markets have tended to be far more illiquid and inaccessible to retail investors. That’s led to institutions being the primary investors, who have the financial position to hold such investments to maturity, over longer timeframes.

Another key difference is the level of transparency relative to each market type. Publicly traded companies are required to disclose financial information to the public, including earnings, revenue, and other financial metrics. While such disclosures help to inform investors, they add a significant overhead to a business.

The SEC estimates initial compliance costs for an IPO at $2.5 million with an ongoing cost overhead of $1.5 million annually. Private companies, on the other hand, are not required to disclose this information to the public and with that, they don’t have the associated expense.

Liquidity makes for another key differentiator. Investors can trade in and out of publicly traded securities with relative ease through their brokerage account, brokerage website or mobile application, or with the help of a financial advisor. On the other hand, private securities tend to be more difficult to sell, resulting in greater challenges for investors in terms of accessing their capital or exiting their investments in a timely manner. This illiquidity also contributes to what some call a discount factor that is applied to private market assets.

Despite some of the comparative drawbacks relative to public markets, private markets are growing strongly. By 2027, it’s estimated that on a global scale, private assets under management will reach a value of $18.3 trillion. That’s almost double the size of the total value locked within private markets today.

Within the corporate landscape, there has been a shift in recent times in favor of private entities rather than their public counterparts. Alongside that ongoing trend in favor of private companies, a pattern has been established which has seen companies staying private for longer than in times past.

With that shift comes a lucrative opportunity for private investors to reap the benefits of extended exposure to the prime early-stage growth phase of enterprises. Savvy investors are identifying that the knock on effect of this trend in delaying public listing is tipping the scales towards finding the bulk of value creation within the domain of private markets rather than the public markets space. The advent of the Sarbanes-Oxley Act resulted in a much higher bar for publicly listed companies in terms of financial record keeping and reporting requirements. That regulatory headache, together with a general easing of regulatory requirements relative to capital formation for private companies, has incentivized companies to delay plans to seek a public listing.

Staving off a public listing also avoids the need to be overly attentive to missed earnings targets and managing investor’s expectations on a quarterly basis. This allows the business to focus on a long-term growth strategy.

It’s clear that blockchain is set to be another evolutionary step in the further development of markets — both public and private. Many industry commentators have expressed the opinion that in the coming years, publicly traded stocks may be tokenized. That’s a view that former SEC chairman Jay Clayton shared during his tenure at the Commission.

Although public markets work relatively well for most investors today, there are a lot of costs and intermediaries required to settle trades. For instance, if you wanted to buy a share of Tesla stock, you would visit your brokerage website and put in a request to buy a set number of shares. If set to a market order at current market price, then those shares would likely appear in your brokerage account within that business day.

In reality, it takes two days for your trade to actually settle. In the background, your brokerage is working through multiple intermediaries to settle that trade. Blockchain changes that, by enabling real-time settlement directly between two-counterparties who otherwise may have no relationship. This result has the potential to result in significant cost savings, while reducing the risks associated with the current process. Though to the investor, the experience for the investor may not change at all.

Blockchain does bring incremental benefits to the public market participants. For instance, today, markets are open Monday through Friday during market hours. You can place trade orders anytime, though they’re commonly only recognized during market hours. Blockchain does not require the same level of human intervention. Instead of back-office processing that ordinarily takes place during business hours, instantaneous settlement can happen 24 hours per day, 7 days a week⁠ — including holidays.

With blockchain and digital asset securities, the investor can retain ownership of the asset directly in their digital wallet, giving investors greater control and flexibility to move tokens from marketplace to marketplace, and to exchange directly with other investors.

All of what’s been shared applies to both private and public markets. Though the private markets have seen less innovation over the years, and are ripe for new innovation that could significantly improve the experience for firms and for broadening investor access.

While many of the advantages of blockchain and tokenization apply to public markets, we can expect that those benefits will have a much more profound effect where private markets are concerned. Blockchain, digital asset securities and digital platforms help to resolve current-day shortcomings in the private markets with increased accessibility, efficiency, and liquidity. It’s reasonable to expect that over the coming years digital asset securities within private markets will have become much more common for investors.