The negative impact of the COVID-19 virus on economic, social and political levels has been causing a particular ripple effect on capital markets. Within weeks, stock market prices around the world took a significant hit, crushing billions of dollars of investors’ money.
Offices are not occupied by employees and the white-collar generation is mainly working from home since then, being forced to utilize online communication channels to maintain the operations of the business. Home office was perceived a risk factor for any financial institution for over a decade. Today, the majority of staff was sent home to work from there.
Digital transformation, although a narrow word in today’s era, has become a top priority on the agenda of any executive in the financial industry. FinTech companies have been transforming the financial industry along the entire value chain. COVID-19 has been a technological stress test for all institutions and organizations around the world, and it was the pandemic that pulled the trigger to boost innovation.
In parallel, the ever-increasing competition between public and private markets is reaching new heights. Private equity’s net asset value has grown more than sevenfold since 2002, twice as fast as global public equities. On the contrary, the trend of the shrinking public market continues across countries. From 1996–2016 the number of publicly listed U.S. companies has fallen by about 50 percent.
While private markets in equities and debt continue its growth path despite the current macroeconomic challenges, private market infrastructures such as platforms or marketplaces matching investors with issuers continue to reach maturity in times of technological transformation.
However, private markets are still facing liquidity constraints. Although infrastructure continues to reach adoption among financial intermediaries, capital markets still lack sophisticated markets. Marketplaces or platforms are required which enable discrete information sharing with each investor category but also align with the interests of the financial intermediary and the issuer itself.
Hence, a working private market is still fragmented in its own way as financial intermediaries are still protective with deal flow sharing as marketplaces are still perceived as retail investor dominated crowdfunding markets.
However, democratization of private equity is moving forward. According to Bain & Company’s report, given the growth of the private markets and their higher return potential vs. public markets, making private equity more accessible to retail investors is gaining importance.
Already, retail investors are struggling to gain exposure to the small and middle-market companies that have been the bread and butter of private equity. These companies are increasingly turning to private financing to avoid the cost and hassle of being publicly traded. Individuals are missing out on the opportunity to invest in fast-growing start-ups with potential to generate big returns as companies stay private longer. Now, as a growing number of traditionally public companies go private, it makes more sense than ever to push the door open for retail Private Equity investors. Around 15% to 20% of Blackstone’s annual fundraising already comes from retail investors, and this is likely just the start.
Besides COVID-19 pandemic and the rise of private markets, investors’ needs have been changing.
Over the last five years online crowdfunding campaigns have reached unprecedented popularity among retail investors. Although, such investment patterns do not hold up in the segments of professional and institutional investors, online marketplaces have triggered changes in behavioral patterns on how investor are researching, selecting, executing, holding and managing investments. As an example, online stock brokerage platforms have been competing in a zerocommission trading as well as tractional investing environment.
Consumer expectations of zero fee services is putting pressure on banks and financial intermediaries wishing to keep up fee levels around asset servicing, account management or custodian servicing. At the same time, the ease and access of information due to the internet and platforms has self-empowered investors to research and take qualitative investment decisions up to a certain degree.
In fact, according to mindtouch, 50% of generation Y view self-service as a part of the brand promise, hence pushing the financial services industry even more towards a transparent playground. The need for private banking or asset management services has been decreasing in some fields. Consumer behavior has dramatically changed over the last five years while banks and financial intermediaries only gradually improved on how to match their service offering with the customer needs.
In summary, these market forces such as the technological transformation due to the COVID-19 pandemic, the ongoing transition from public towards private markets as well as changes in consumer needs have triggered behavioral and procedural changes in Capital Markets. In times of such structural adaptations, area2invest has entered the regulated institutional, professional and private market to align and match the interest of all participants in Capital Markets and facilitate sophisticated liquidity provisioning.