Differences between Public Markets and Private Markets

Securities make up a growing proportion of transfers around the world, yet the majority of them are difficult to trade since the ability to sell depends on the market they’re traded in. There are two types of markets: the public market and private market, and both act as a way for companies to finance themselves as well as a medium for investors to invest their capital. While both are predominant in the global economy, there are significant differences between the two and great variation of access across them.

What are the differences?

Most individual investors are familiar with the public markets, where investing in and trading securities like public company stocks, mutual funds and ETFs is very accessible and inexpensive to trade through traditional brokerage firms. Most individuals have access to participate in the public markets, and liquidity in publicly traded securities is typically available.

The private markets, on the other hand, are not as widely known or talked about, in large part due to the fact that many U.S. residents are excluded from participating. The first words that often come to mind when thinking about private markets are pre-IPO “unicorns” and the lead-up to the initial public offerings (IPOs), but there is a lot more to the private markets than this.

Like the public market, the private market is composed of many different asset classes including equity, debt, real estate, and funds, which are typically referred to as alternative assets.

How the markets have historically functioned

The current differences in the public and private markets have been defined by regulations, investor access, and liquidity.

The Securities and Exchange Commission (SEC) over its nearly century-long history has developed and refined clear guidance on the process of investing and trading public market securities. Securities issued in the public markets typically require substantial public disclosure through expensive and time-consuming filings with regulators. In order to issue and maintain a public market security, companies are required to disclose information about their financials, revenues, and performance while remaining accountable to their shareholders.

The massive number of investors interested in participating in the public markets has grown over time which has invited more intermediaries who have contributed technological advances to drive speed and security, enabling trading volumes to flourish.

Private markets seemingly haven’t had the same level of oversight. Private market securities generally require less SEC documentation, and typically only for fundraising activities. This, in turn, makes it less expensive and time-consuming for private companies to raise capital. However, this reduced level of oversight is also seen to be more risky for individual investors, which the SEC aims to protect from unknown investment risks.

With limited access and historically smaller institutional participation when compared to public markets, the private markets have been more illiquid and highly manual for both companies and investors to trade in. But as with most things, the increased awareness of the private markets potential has garnered more demand, opening the door for change.

Creating access and efficiencies in the private markets

Things are changing, and there are three driving factors: private market growth, technology, and greater regulatory oversight and clarity.

Today, the U.S. private market is larger than the public market, with statistics showing that public markets have raised $1.4 trillion in capital for issuers, as opposed to the nearly double $2.9 trillion in capital raised in the private markets.* It is also believed by some investors that there is greater upside potential in a private market security than a public market security.

Although private markets are larger, they have been very illiquid in comparison to the public markets, and as a result, institutional investors often hold their private market investments to maturity (think: years).

When looking at trading volumes you’ll see a large discrepancy between the two markets. Public markets see $33 trillion in annual trades, whereas private markets only see $100 billion (or $0.1 trillion) in trades, and that’s where improvements in technology and oversight are expected to be game-changers.*

In the most recent years, the SEC has introduced changes to make the private markets more accessible to individual investors and to make fundraising from a broader group of investors more accessible to private companies. They’ve done this through new regulations, such as Regulation Crowd Funding (CF) CF, Regulation A+ (also called the mini-IPO) and others, which allow accredited individual investors - and some retail investors - to participate.

Along with these changes in regulation is also the introduction of the blockchain and companies like Securitize leverage decentralized ledgers to issue and record ownership for private market securities. These newer companies are different from the intermediaries in the public markets in that they are operating on the latest technology, which enables them to offer a single, fully-digital process that makes it possible for trade settlements to occur within the same day as opposed to days or weeks (like the public and secondary market). Advances by companies like Securitize are enabling liquidity in both primary and secondary markets, answering the overwhelming demand for access, transparency, and security.

*Sources: SEC, Thomson Reuters, Statista, Private Placement Monitor, WSJ, FT, Bloomberg, Fortune, Autonomous Research / Fintech Group 2016, Harmonization of Securities Offering; Setter Volume Report FY 2018, World Federation of Exchanges database as of 2019.

Contributing Writers: Michael Penfield, Christie Olsen