The state of private markets: Unlocking an advantage through digital transformation

Diego Rivera’s Detroit Industry Murals

Private markets are a massive market — there are currently $11 trillion in private assets under management (AUM), and it’s grown at an annual rate of almost 20 percent since 2017. While it’s only a tenth of the size of public markets, investors are increasingly looking to private markets to take advantage of the low correlation to public markets and amplify returns. This increase in capital and the number of market participants has only amplified the urgent need (and opportunity) for digitization and efficiency in private markets. The good news is that in 2023 we witnessed an emergence of sophisticated companies and tools that are helping to meet the digital demands of this complex asset class.

One of the historical challenges of private markets is illiquidity. It’s often debated whether the illiquidity of private markets is a feature or a bug: given the typically long holding periods and sheer number of private companies and funds in the world, transparent (not to mention executable) pricing and liquidity can be incredibly challenging. But that doesn’t mean mechanisms for liquidity can’t exist, particularly given the influx of new participants into the private market. This is where Anthemis portfolio company Liquidly comes in. They have created much-needed infrastructure for both fund managers and LPs to buy and sell secondary positions in their funds, creating a useful off/on ramp for GPs and LPs that were otherwise locked into a fund’s historically long lifecycle.

Another component of private markets is fund formation — an estimated $9 trillion of the $11 trillion in private market capital sits in funds (e.g. CRE, private credit, etc). Fund managers, syndicate leads and other institutions rely on fragmented legal, accounting, tax and compliance specialists to form, register and manage investment vehicles. These are necessary but mundane workflows that are ripe for disruption by software. That is the thesis behind Sydecar. Led by co-founder Nik Talreja, Sydecar has developed technology to standardize and automate the complex workflows involved in launching and managing private market funds and SPVs. The platform addresses a critical challenge in private capital formation: it significantly reduces the costs and time required for fund managers to enter the market. This efficiency opens doors for a broader range of investors to participate in and benefit from investment opportunities, increasing accessibility in private markets.

Access to private fund managers and the ability to invest in these vehicles has also been historically limited to a finite number of LPs with direct relationships. New companies like Allocate are not only providing digital access to a wide range of private market funds, but also giving qualified investors market data and benchmarking resources that shine much-needed light into the opaque world of alternative private investments. Whereas family offices and RIAs would have historically needed to build hundreds of relationships with GPs and fight for allocations, Allocate makes fund discovery, investment and reporting as efficient and cost-effective as using a standard digital brokerage account.

Finally, it’s worth recognizing the transformative impact LLMs and generative AI will have on private markets. These phenomena have revolutionized our ability to effectively manage, process, and extract value from unstructured data — a particularly noteworthy aspect of private markets. In contrast to public or institutional markets, where data is meticulously structured, even in complex instruments like over-the-counter (OTC) interest rate swaps or credit derivatives, private markets thrive on a less standardized and more fluid landscape. Anthemis portfolio company Carta, one of the pioneers of cap table management for private companies and funds, is using generative AI across its cap table and ventures businesses to speed up consumption and data extraction of legal documents.

We’re only at the beginning of the digital transformation of private markets. We don’t expect a copy-paste from public markets infrastructure, but we do expect to see the more modern design and private markets-specific solutions that usher in a golden era of private market innovation. If you or someone in your network has an idea or is working on a company in this space, the Anthemis team would love to connect.

You can also watch our recent webinar discussing the state of private markets here.