A short primer on market dynamics
What are the differences between public and private markets?
Public equity markets
Generally, public-market equity is widely understood and highly liquid making it a viable option for most types of investors. For buying and selling public-market equities, the market is commonly referred to as the "stock market."
Most publicly traded stocks are available and easily traded daily through public market exchanges. Stocks are traded in an open market from buyer to seller.
In these instances, the price is determined by the marketplace. Through a massive series of independent yet interconnected trades, the market steers the price of an asset toward its actual value through the natural workings of supply and demand. Determining the market value of a publicly-traded company can be calculated by multiplying its stock price by the number of outstanding shares.
And because public companies must adhere to accounting and reporting standards, both the buyer and seller have access to the same information to help validate their intent to buy or sell at any given price. Oversight is provided by individual stock markets.
Venture capital or private company investing is generally geared more for sophisticated investors and often requires that investors are accredited with certain minimum requirements (such as net worth). This is partly because these investments are illiquid, long-term (over multiple years), and involve a high level of risk. At the same time, they have a potential for outsized returns.
There is no “mainstream” marketplace, and no simple mechanism for liquidity of venture capital investments. Private company investors are generally paid out through distributions. In some cases, investors receive distributions throughout the life of their investment – such as in the case of a fund that invests in multiple underlying companies, or from dividends. In the case of direct investments in a single company (such as a Brightspark SPV investments), investors usually only receive distributions when (and if) the company or the fund goes through a liquidation event such as an acquisition or an IPO.
Liquidity through secondary selling
Exceptionally, private investors can get liquidity on their investment through “secondary selling” to another private investor - this is often a transaction that is managed by an Exempt Market Dealer. This desire to sell can be driven by an investor’s unexpected need for cash, or a desire to rebalance their portfolio, for example.
In the case of a secondary sale, the price is determined in an agreement between seller and buyer. As there is no liquid market with readily available prices, both parties rely on some of the limited information available to them such as valuations (historically, what have other investors paid for/valued this asset, or book value), comparables, and general economic trends in that industry. Additionally, purchasing investors in private secondary sales often demand an “illiquidity premium” (a discount on the book value of the asset at that point in time).
Often, the sale and purchase of shares in a private company are restricted and controlled by shareholder agreements of the company. Such agreements lay out regulations regarding potential secondary sales and in many cases restrict them completely. In the case of a VC fund owning those shares, they can occasionally facilitate secondary sales of the fund units because this does not change company share ownership as restricted by shareholder agreements.
Secondary selling and buying through Brightspark
As an exempt market dealer, Brightspark is exploring how we can facilitate secondary selling transactions and ensure that they are processed in a fair, transparent and compliant manner for both sellers and buyers.
If you are interested in this new offering, we invite you to contact our team.