Why the Time Is Right to Launch a Digital Securities Firm
Private capital markets have grown and so is the need for a Digital Securities Firm to disrupt the industry to increase access and efficiency.
The world is in the midst of a pandemic, global GDP is forecast to drop 4.9% (-8% in developed economies) this year, and companies around the world are struggling to raise financing. Yet, we believe the time is right to launch a digital securities Firm.
Atlas One Digital Securities is a Canadian-based start-up with the vision to disrupt the private capital markets. We will leverage digital solutions, such as Software as a Service (SaaS) investment platforms and open-sourced distributed ledger technology (DLT) to reduce the funding cost for issuers and increase access to investment opportunities for investors. We will initially focus on real estate (RE) assets, the largest asset class and untapped private market opportunity in the world and build an end-to-end ecosystem to service the needs of issuers and investors.
What problems in private capital markets are we trying to solve?
Private capital markets have grown dramatically in the past two decades as regulatory changes following accounting scandals in the early 2000s prompted companies to stay private longer, and institutional investors gradually increased their appetite for private market opportunities.
In fact, between 2017–19, the $2.4 Trillion (T) raised in private markets exceed that raised in public equity markets.
And there is even more potential in the vast asset pool of real estate. In 2017, the value of residential real estate globally was $221T and commercial real estate was $33T. However, only $9.6T of mostly commercial real estate assets are professionally managed, and publicly listed Real Estate Investment Trusts (REIT), which is genuinely available to individual investors, is approximately $2T in developed markets.
Despite this impressive growth and set of opportunities, private capital markets suffer from major challenges. The biggest challenge is the barriers to access and high transactions costs in making private market investments. Start with the comparison to public markets through a typical on-line brokerage platform such as InteractiveBrokers LLC. There are simple on-line onboarding processes, clear real-time quotes, one-touch execution, simple mechanisms to fund accounts and manage custody, and access to 135 markets in 33 countries. Millennial-oriented mobile first platforms like Robinhood have an even better client experience. In contrast, if you want to invest in private capital markets — a private equity fund, real estate investment, or start-up — investors face a tedious onboarding for each investment, a bespoke legal agreement that can run into hundreds of pages, and lengthy settlement processes involving wire transfers and receipt of physical securities. The client experience is terrible. Moreover, every jurisdiction has a different regulatory regime which effectively balkanizes private capital into country markets. Finally, secondary liquidity is limited as the weeks to months long primary issuance process is similar in secondary markets, and the lack of liquidity often results in 10–25% discounts to net asset values. Trading in private markets amounted to $90Billion (B) in 2019 vs $101.6T in public equity markets.
These challenges lead to significant drawbacks for issuers and investors. Due to the cost and complexity, access to private capital markets are mostly limited to institutions and affluent investors. Ticket sizes for investment need to be sizable to cover the fixed costs of deals. Crowdfunding platforms have picked up some of this gap by giving access for smaller ticket sizes, but the $27.5B raised world-wide to 2017 pales in comparison the overall private capital markets and is mostly focused on lending and venture investment. The limited access to private markets has a profound impact on individual investors as opportunities and returns are lost. Returns by private equity funds have been higher than public markets since 2009 with investors earning over 2 times more than the S&P 500 between 2009–16 (source: McKinsey Global Private Markets Review 2022, February 2022).
The second drawback is that companies and issuers also suffer higher costs and reduced opportunities to access investors. The illiquidity of private capital markets can also drive sub-optimal capital allocation decisions. Private equity funds need to ensure liquidity for their investors by structuring their portfolios to generate exits in a 8–10 year time horizion. Real Estate in particular would benefit from longer investment time horizons to take advantage of cyclical downturns to acquire lower priced assets. Evergreen funds which remain constantly invested with ultra-long investment horizons would solve that issue but are difficult to create due to the lack of secondary liquidity for investors.
How are we going to solve the private capital market problems?
First of all, we need to admit we cannot do it all ourselves. A major disruption of capital markets this large and diverse requires a band of followers — an ecosystem. As the chart below highlights, we will work with entities to build an end-to-end set of solutions — all of which have an incentive to solve the problems of private capital markets.
This will ensure that issuers and investors do not need to create the end-to-end investment solution themselves. Instead, an ecosystem of broker-dealers onboarding investors, custodians providing safe-keeping, new DLT exchanges providing liquidity, settlement banks dealing with cash, as well as data and analytics firms, software providers, incorporation firms (and more) will provide that solution collectively.
Secondly, we will utilize digital investment platforms and open source DLT technology to quickly build and launch solutions. Our investment platform is a white-label SasS solution that already has a network of broker-dealers with many of the simple to use digital features available in the market. Our platform will replicate the client experience of investing seen with InteractiveBrokers and RobinHood. We have developed an open source digital securities offerings (DSO) issuance platform and will utilize cloud based DLT providers to quickly and inexpensively go to market.
Thirdly, DLT itself addresses many of the challenges in private capital markets. Smart contracts linked to investment offerings on the platform speed the legal issuance process and address jurisdictional regulatory restrictions that would allow us to offer DSOs internationally. Transaction records become immutable and transparent to investors. We will also ensure interoperability across different blockchains with no alignment to a proprietary protocol — a challenge many in the nascent DLT industry have created, which we will avoid.
Finally, we will focus on ensuring quality investment products from day one with a focus on real estate. Investors globally understand real estate as a hard asset generating stable income. Real estate is also a well understood investment in our core market of Canada. We will work with RE marketplaces, developers, and RE Fund managers to bring quality products to investors.
What makes Atlas One different from other players in the industry?
As stated, we will not do this on our own. Instead of trying to conquer the world or corner the market with our unique protocol, our focus is working to create an ecosystem that will support issuers and clients to develop private capital markets.
Our distinction is based on four principles different from other players:
1) End-to-end view. Although we are focused on the primary side of the market, we will offer issuers and investors an end-to-end experience to ensure they don’t need to shop around themselves to finish a transaction;
2) Open and interoperable. We will create strategic distribution and investor partnerships, and will work with various technology platforms and solutions. This means we will not source all deals, find all investors, or limit ourselves to just one technology platform or solution, and instead focus only on what works for issuers and investors;
3) Quality investment products. Creating a marketplace is often a chicken and egg issue — do you need product or investors. We have decided that focus needs to be on originating quality product that will attract investors, and that will be real estate; and
4) Regulated and high standards. We will operate as a regulated entity with high standards of compliance. Many players in the DLT space have not operated professionally in the past three years and trust has been lost amongst investors. We plan to be among the growing legion of credible regulated players, providing confidence to issuers and investors to participate in this new asset class.
Disrupting private capital markets will not happen quickly, but within the general disruption we are seeing in the global economy, and leaps we are seeing in digitization across many businesses, the time is ripe for a digital securities firm to tackle this challenge.