Alternative investment markets could cease to exist within five years

On average, the cost of listing on the London Stock Exchange’s Alternative Investment Market (AIM) is 11% of funds raised. Is this a reasonable amount, or are companies giving away too much hard-earned capital in order to see liquidity?

On top of listing costs, add in the cost of actually becoming a public company (compliance, regulatory overheads, a team of investor relations staff, semi-annual audits – just to name a few requirements), and it’s questionable why companies even go public at all.

It turns out, many large private businesses in the UK think the same way. In our recent research report, 87% of the UK’s largest private companies said they prefer to stay private for as long as possible. Half (50%) cited the administrative overheads as too great, while just over a quarter (27%) said the cost of going public isn’t worth it.

So why even go public in the first place?

In that same survey, of those businesses that did intend to list at some point, the reasons were fairly evenly split between access to greater funding, founders wishing to sell shares, and being attracted to the prestige of a senior leadership role of a public company.

Clearly there’s nothing that can compensate for someone looking for the prestige, however the former two points have now been solved – something that many have yet to realise.

Public markets have been the place institutional investors turn to because of access to liquidity. There has also been a far greater level of efficiency than private markets – due to the slew of central institutions behind the scenes that ensure reliable settlement of every transaction (such as clearing houses, settlement agents, and CSDs). However, it should be noted that outside the large caps, liquidity is actually quite poor. Average monthly turnover on the LSE AIM market, excluding the 10 largest stocks, is only 4% per month². It’s no wonder then that a large portion of trades are executed off-market.

On the other hand, private markets are growing exponentially. Globally, private markets are now valued at $9.5 trillion and forecast to reach $14.4 trillion by 2025. Private share exchanges such as Nasdaq Private Market and Forge match many billions of dollars of transactions every month.

The limiting factor with private markets to date has been the lack of any settlement process. Investors that match on private share exchanges have to settle bilaterally against each other. No clearing house, no settlement agent, no CSD.

That’s now changed. We’ve all heard the robots are coming. Well, they’ve arrived.

Fully automated settlement of private securities – no humans involved – is now a reality, and it’s already working. Over $7 billion of private shares and debt instruments have been created in this fully digital manner in the UK alone, which we know, as we invented the technology.

It works by digitising all the legal elements that constitute a private security under existing regulation. That digital security can then be transferred at the speed of electricity, with all relevant regulatory processes happening automatically to complete the legal title transfer.

The implications are staggering.

Companies can now host a liquidity round in their own securities, processing many thousands of transactions in a single day, with no noticeable administrative overhead. Those companies could host liquidity rounds on a monthly, weekly, or even daily basis.

Investors now have a highly accessible, efficient, and cost-effective route to liquidity in private securities. In addition, trades are no longer bilateral. Instead, investors only face the company – providing the same anonymity as public markets today.

Founders have a route to exit by participating in those same liquidity rounds.

This technological leap in private markets enables companies to stay private. With the excessive costs involved in an IPO, there’s no justifiable reason why companies should go public anymore.

There will of course always be a place for the very largest of public listings, when volume traded is so great that investors can access significant liquidity at all hours of the day. But it’s quite clear that days are numbered for smaller investment markets, like the LSE’s AIM.