There’s no doubt that there is very limited transparency in the private capital markets today. On the other side, the public capital markets have tremendous transparency. Greater transparency in the private capital markets results in a more efficient dissemination of information, a trait that public markets already exhibit. Public markets display relative efficiencies from liquidity due to disclosure requirements and an investor’s ability to cheaply and readily acquire this information. As most investors would never think about investing in an opportunity without sufficient information, it is logical that due to the opacity of the private markets, many investors are left out of this space altogether.
Why is Transparency Important?
So why is this transparency important? Public markets pay a price for the ability to acquire capital from the public and be listed on a public exchange. Registration, disclosure, auditing, and compliance costs are typically very expensive. Public firms are increasingly under the microscope and scrutinized inside and out. Public firms are also inherently less nimble and have to satisfy shareholders, spending significant resources in public relations and focusing on stock price as a measure of a firm’s success. On the other hand, private firms do not need to disclose any company-specific information to non-essential stakeholders including financial information or any material changes to the organization.
Difference Between Private and Public Markets Right Now
The structural differences between public and private companies also lead to differences in how investments in these entities are treated and conducted. Due to costs, risks, and size requirements associated with being a public company, most firms remain private. Requiring all companies to disclose information in the same transparent fashion would be unreasonably burdensome and expensive to small businesses and startups. This is where private placement disclosure requirements stem. These disclosure standards represent a middle ground, where the costs are reasonable for private companies, and the disclosure is reasonably transparent for investors. As a result a system is created in which private capital markets remain more opaque than public markets, and only accessible to a small percentage of investors. This logical separation has created a whole industry of investment professionals dedicated to diligencing and screening opportunities within the private capital markets. Since many investors have a difficult time accessing information on private investment opportunities, venture capital and private equity firms serve to fill this gap and specialize in investing in these opportunities on their behalf.
Benefits of Having More Information in Private Markets
After the passage of the JOBS Act and the advent of digital platforms, the private markets will be forced to become more transparent, and as a result, more efficient. Companies that are raising money through private placement offerings can now advertise their raises as an exemption under regulation D. As a result, opportunities can be accessed globally. With greater access comes greater competition for the best deals, resulting in greater transparency. Natural selection would theoretically weed out the bad deals and dangerous players in these markets. This greater informational efficiency will also result in more investors and investment professionals understanding the dynamics and potential for lucrative returns through private capital market investing. This market is still off-limits to the retail investor. However, with these new efficiencies imminent, investors qualified to participate in private investments can be more confident in the future potential for enhanced returns.
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