Eric Folkemer, Head of Nasdaq Private Market and Lawrence Calcano, CEO of iCapital Network
For many high net worth investors, private equity has long been an appealing asset class, but is often ruled out because of an unavoidable issue: The need to hold an investment for many years before a chance to cash in. Now, iCapital Network and Nasdaq Private Market have created a fintech platform designed to fix that problem.
iCapital, which manages $40 billion across private equity-funds and other alternative assets generally reserved for institutions, has a strategy of pooling together resources from high net worth clients to purchase pieces of deals alongside the big guys. Until now, that still left the issue of getting out of investments sooner than endowments or pensions, which naturally have very long time horizons and don’t mind the wait.
But through a venture with Nasdaq Private Market, which helps provide liquidity to private companies, iCapital aims to build a digital secondary market where high-net-worth investors in its sponsored funds can find potential buyers long before underlying funds would liquidate. The idea is similar to iCapital’s approach on the entry, when it pools individual accounts together; similarly, iCapital can bring together potential sellers and create critical mass to appeal to an interested buyer.
“We are democratizing what’s been an institutional asset class,” Lawrence Calcano, CEO of iCapital told CorpGov in an interview. “High net worth individuals should be about to get out of investments at their own pace and we decided to partner with Nasdaq, which is synonymous with providing liquidity.”
Mr. Calcano pointed out that there’s good reason for investments to remain private, say, five years into the life of a fund. During that time, private-equity funds are in the midst of business changes that are often difficult to effect under the scrutiny of public investors.
The reality, however, is that even very wealthy individuals can experience life changes that require immediate cash. With iCapital’s high net worth clients making investments for as little as $100,000, they may simply need to pull together funds to purchase a new home.
Mr. Calcano added that while there is already a vibrant market for secondary investments in private-equity and other alternative funds, it’s not generally available to high net worth investors who may only have a few hundred thousand dollars in a particular fund. Instead, it is the likes of Calpers or large university endowments that can attract bidders and obtain a fair price.
The new platform will integrate iCapital’s platform technology with Nasdaq’s qualified matching service, which helps investors put private holdings up for auction. The qualified matching service will be fully digital, with advisors to high net worth investors getting access to Nasdaq’s existing list of qualified potential buyers.
In theory, the process should be as simple as buying and selling mutual funds online, Mr. Calcano said, acknowledging that iCapital’s funds can’t be quite as liquid.
At the moment, several private banks dealing with high net worth individuals offer liquidity to clients, but it tends to be on a manual basis rather than on a centralized platform. Those banks could also face conflicts if they represent both buyers and sellers.
“It should be arm’s length,” said Eric Folkemer, Head of Nasdaq Private Market, adding that “technology is needed to achieve scale.”
The new partnership, which is expected to go live later this year, is focused on iCapital funds. But Nasdaq could easily create similar platforms for other fund families or alternative asset classes, he said.
“We’re agnostic to the wealth platform,” he said. “The technology should be there to serve any type of investor.”
Investment advisors say Nasdaq has been helpful with clients in need of liquidity at times of duress. Robert Silvani, a veteran financial advisor who focuses on pre-IPO shares, has worked with Nasdaq when clients needed to sell.
“They seem to be able to get better pricing for the seller than the others that buy when it’s a distressed, highly-motivated seller,” Mr. Silvani said. “Liquidity needs drive decisions sometimes and when a private owner needs liquidity because of the 3 D’s – Death, Disability or Divorce – good, illiquid investments become low priced.”
John Jannarone, Editor-in-Chief