Industry

What does ‘democratizing’ private markets really mean?

Mar 10, 2023

‘Democratize’ is a word rarely heard at Hedgehog HQ. If it is uttered, it’s with a furtive glance over the shoulder and air quotes. This misnomer, coined in the early 90s to describe the increasing accessibility of technology – and trotted out by marketing teams the length and breadth of tech ever since – has been used so often it's on the verge of losing its (made up) meaning. 

Ignore for a moment that to democratize means to introduce a democratic system. In a private markets setting, ‘democratizing’ markets requires more than a technology that simply makes a product or service accessible. Technology can deliver innovative means by which to invest, but access requires more than just means, it needs regulation as well. 


Regulation vs. technology

We routinely see examples of how discord between tech and regulation plays out. In the last couple of weeks, speculation that the Securities and Exchange Commission (SEC) might clamp down on services offered by well-established players in the crypto space highlighted that tension. Even cutting-edge technology can be lampooned by an uncertain regulator.

These themes were echoed when Hedgehog recently hosted a roundtable event, bringing together experts in legal, regulatory policy and compliance to discuss some of the challenges and opportunities that exist for firms in the crypto-asset space in the UK. There was broad consensus amongst that group that to truly harness the benefits brought by new and emerging technology, the regulatory environment needs to keep pace, both to offer firms certainty around their regulatory obligations but also to enable regulators to meet their own objectives. 

Perhaps unsurprisingly, private markets have trod a more traditional path towards ‘democratization’. The mass influx of retail money into public markets during the pandemic reinforced to policymakers that retail investors represented a not small amount of capital which could be just as helpfully deployed in private markets to drive economic growth. 

The result was a trend towards updating regulatory frameworks to support access and encourage individuals to engage in alternative assets. The European Long Term Investment Fund (ELIF) and the UK’s Long Term Asset Fund (LTAF) are both designed to facilitate access to private markets for qualified investors. Similarly in the US, a ruling at the beginning of last year allowed pension schemes (401k) to invest in certain private equity opportunities. 

Yet, regulation still presents challenges when it comes to opening up the private markets. Of all the things it’s been accused of over the years, no one has ever called regulation speedy. If opening up the markets is dependent on technology and regulation, then the biggest challenge for regulators is keeping up with the pace of technological innovation. The main aim of their game is to keep investors safe, and applying an established regulatory structure to brand new technology is no mean feat – just ask the SEC about its ongoing debate over what constitutes a security. 


Opening up the markets

Historically, individual investors were kept out of the private markets by the complexity of alternative assets, their relative scarcity and illiquid nature. But technology has succeeded in breaking down many of these barriers, and individual investors have the opportunity now to employ investment strategies we normally see from hedge funds and institutions. This is the first high inflationary environment where individual investors can easily diversify into hedges such as real estate and infrastructure. 

From property development to early stage business and peer-to-peer loans, platforms like Hedgehog (Hi!), Moonfare, Seedrs and Masterworks are just a few of those providing individual investors with direct access to the private markets. Changes to regulations and increased demand from individual investors have prompted many asset managers to develop products and services for this market as well. In these cases, technology can be used to automate processes like onboarding and reporting, reducing overheads so investment managers can provide services to smaller investors. 

In the future, there is huge potential for technologies like tokenization to increase access to the private markets still further. Tokenization could reduce the need for intermediaries and facilitate fractional ownership, as well as supporting a secondary market for long-term, illiquid investments. But to be truly accessible, this future tech will need to interact with today’s (legacy) systems, if advances like tokenization can’t be integrated into traditional finance it will struggle to scale. 

Of course, opening up the markets is about more than just providing means and regulation, education is another key component. Investors need to have a clear understanding of what they’re investing in and technology once again plays a significant role here in ‘democratizing’ information. Financial literacy is vitally important, particularly as individual investors gain access to markets they’ve not been able to participate in before.


Technology + Regulation = Access 

Opening up a broad range of investment opportunities to investors of all shapes and sizes will not only drive economic growth, it’ll provide greater financial independence for individuals and give everyone the same opportunities, whether they’re an institution or a family of four. That access will be granted by the intersection of technology and regulation – and there’s nothing democratic about that. 





Nothing in this article constitutes financial advice or guidance. The content in this article is an opinion and is for general information purposes only. This article is not intended to be relied upon to make financial decisions. It is not intended to be financial advice. The value of your investment can go up or down so you may get back less than your initial investment. The article may contain links to third-party websites or resources. Hedgehog provides these links and resources only as a convenience and is not responsible for the content, products, or services on or available from those websites or in those resources, the links displayed on such websites or the privacy practices of such websites.‍

Industry

What does ‘democratizing’ private markets really mean?

Mar 10, 2023

‘Democratize’ is a word rarely heard at Hedgehog HQ. If it is uttered, it’s with a furtive glance over the shoulder and air quotes. This misnomer, coined in the early 90s to describe the increasing accessibility of technology – and trotted out by marketing teams the length and breadth of tech ever since – has been used so often it's on the verge of losing its (made up) meaning. 

Ignore for a moment that to democratize means to introduce a democratic system. In a private markets setting, ‘democratizing’ markets requires more than a technology that simply makes a product or service accessible. Technology can deliver innovative means by which to invest, but access requires more than just means, it needs regulation as well. 


Regulation vs. technology

We routinely see examples of how discord between tech and regulation plays out. In the last couple of weeks, speculation that the Securities and Exchange Commission (SEC) might clamp down on services offered by well-established players in the crypto space highlighted that tension. Even cutting-edge technology can be lampooned by an uncertain regulator.

These themes were echoed when Hedgehog recently hosted a roundtable event, bringing together experts in legal, regulatory policy and compliance to discuss some of the challenges and opportunities that exist for firms in the crypto-asset space in the UK. There was broad consensus amongst that group that to truly harness the benefits brought by new and emerging technology, the regulatory environment needs to keep pace, both to offer firms certainty around their regulatory obligations but also to enable regulators to meet their own objectives. 

Perhaps unsurprisingly, private markets have trod a more traditional path towards ‘democratization’. The mass influx of retail money into public markets during the pandemic reinforced to policymakers that retail investors represented a not small amount of capital which could be just as helpfully deployed in private markets to drive economic growth. 

The result was a trend towards updating regulatory frameworks to support access and encourage individuals to engage in alternative assets. The European Long Term Investment Fund (ELIF) and the UK’s Long Term Asset Fund (LTAF) are both designed to facilitate access to private markets for qualified investors. Similarly in the US, a ruling at the beginning of last year allowed pension schemes (401k) to invest in certain private equity opportunities. 

Yet, regulation still presents challenges when it comes to opening up the private markets. Of all the things it’s been accused of over the years, no one has ever called regulation speedy. If opening up the markets is dependent on technology and regulation, then the biggest challenge for regulators is keeping up with the pace of technological innovation. The main aim of their game is to keep investors safe, and applying an established regulatory structure to brand new technology is no mean feat – just ask the SEC about its ongoing debate over what constitutes a security. 


Opening up the markets

Historically, individual investors were kept out of the private markets by the complexity of alternative assets, their relative scarcity and illiquid nature. But technology has succeeded in breaking down many of these barriers, and individual investors have the opportunity now to employ investment strategies we normally see from hedge funds and institutions. This is the first high inflationary environment where individual investors can easily diversify into hedges such as real estate and infrastructure. 

From property development to early stage business and peer-to-peer loans, platforms like Hedgehog (Hi!), Moonfare, Seedrs and Masterworks are just a few of those providing individual investors with direct access to the private markets. Changes to regulations and increased demand from individual investors have prompted many asset managers to develop products and services for this market as well. In these cases, technology can be used to automate processes like onboarding and reporting, reducing overheads so investment managers can provide services to smaller investors. 

In the future, there is huge potential for technologies like tokenization to increase access to the private markets still further. Tokenization could reduce the need for intermediaries and facilitate fractional ownership, as well as supporting a secondary market for long-term, illiquid investments. But to be truly accessible, this future tech will need to interact with today’s (legacy) systems, if advances like tokenization can’t be integrated into traditional finance it will struggle to scale. 

Of course, opening up the markets is about more than just providing means and regulation, education is another key component. Investors need to have a clear understanding of what they’re investing in and technology once again plays a significant role here in ‘democratizing’ information. Financial literacy is vitally important, particularly as individual investors gain access to markets they’ve not been able to participate in before.


Technology + Regulation = Access 

Opening up a broad range of investment opportunities to investors of all shapes and sizes will not only drive economic growth, it’ll provide greater financial independence for individuals and give everyone the same opportunities, whether they’re an institution or a family of four. That access will be granted by the intersection of technology and regulation – and there’s nothing democratic about that. 





Nothing in this article constitutes financial advice or guidance. The content in this article is an opinion and is for general information purposes only. This article is not intended to be relied upon to make financial decisions. It is not intended to be financial advice. The value of your investment can go up or down so you may get back less than your initial investment. The article may contain links to third-party websites or resources. Hedgehog provides these links and resources only as a convenience and is not responsible for the content, products, or services on or available from those websites or in those resources, the links displayed on such websites or the privacy practices of such websites.‍

Industry

What does ‘democratizing’ private markets really mean?

Mar 10, 2023

‘Democratize’ is a word rarely heard at Hedgehog HQ. If it is uttered, it’s with a furtive glance over the shoulder and air quotes. This misnomer, coined in the early 90s to describe the increasing accessibility of technology – and trotted out by marketing teams the length and breadth of tech ever since – has been used so often it's on the verge of losing its (made up) meaning. 

Ignore for a moment that to democratize means to introduce a democratic system. In a private markets setting, ‘democratizing’ markets requires more than a technology that simply makes a product or service accessible. Technology can deliver innovative means by which to invest, but access requires more than just means, it needs regulation as well. 


Regulation vs. technology

We routinely see examples of how discord between tech and regulation plays out. In the last couple of weeks, speculation that the Securities and Exchange Commission (SEC) might clamp down on services offered by well-established players in the crypto space highlighted that tension. Even cutting-edge technology can be lampooned by an uncertain regulator.

These themes were echoed when Hedgehog recently hosted a roundtable event, bringing together experts in legal, regulatory policy and compliance to discuss some of the challenges and opportunities that exist for firms in the crypto-asset space in the UK. There was broad consensus amongst that group that to truly harness the benefits brought by new and emerging technology, the regulatory environment needs to keep pace, both to offer firms certainty around their regulatory obligations but also to enable regulators to meet their own objectives. 

Perhaps unsurprisingly, private markets have trod a more traditional path towards ‘democratization’. The mass influx of retail money into public markets during the pandemic reinforced to policymakers that retail investors represented a not small amount of capital which could be just as helpfully deployed in private markets to drive economic growth. 

The result was a trend towards updating regulatory frameworks to support access and encourage individuals to engage in alternative assets. The European Long Term Investment Fund (ELIF) and the UK’s Long Term Asset Fund (LTAF) are both designed to facilitate access to private markets for qualified investors. Similarly in the US, a ruling at the beginning of last year allowed pension schemes (401k) to invest in certain private equity opportunities. 

Yet, regulation still presents challenges when it comes to opening up the private markets. Of all the things it’s been accused of over the years, no one has ever called regulation speedy. If opening up the markets is dependent on technology and regulation, then the biggest challenge for regulators is keeping up with the pace of technological innovation. The main aim of their game is to keep investors safe, and applying an established regulatory structure to brand new technology is no mean feat – just ask the SEC about its ongoing debate over what constitutes a security. 


Opening up the markets

Historically, individual investors were kept out of the private markets by the complexity of alternative assets, their relative scarcity and illiquid nature. But technology has succeeded in breaking down many of these barriers, and individual investors have the opportunity now to employ investment strategies we normally see from hedge funds and institutions. This is the first high inflationary environment where individual investors can easily diversify into hedges such as real estate and infrastructure. 

From property development to early stage business and peer-to-peer loans, platforms like Hedgehog (Hi!), Moonfare, Seedrs and Masterworks are just a few of those providing individual investors with direct access to the private markets. Changes to regulations and increased demand from individual investors have prompted many asset managers to develop products and services for this market as well. In these cases, technology can be used to automate processes like onboarding and reporting, reducing overheads so investment managers can provide services to smaller investors. 

In the future, there is huge potential for technologies like tokenization to increase access to the private markets still further. Tokenization could reduce the need for intermediaries and facilitate fractional ownership, as well as supporting a secondary market for long-term, illiquid investments. But to be truly accessible, this future tech will need to interact with today’s (legacy) systems, if advances like tokenization can’t be integrated into traditional finance it will struggle to scale. 

Of course, opening up the markets is about more than just providing means and regulation, education is another key component. Investors need to have a clear understanding of what they’re investing in and technology once again plays a significant role here in ‘democratizing’ information. Financial literacy is vitally important, particularly as individual investors gain access to markets they’ve not been able to participate in before.


Technology + Regulation = Access 

Opening up a broad range of investment opportunities to investors of all shapes and sizes will not only drive economic growth, it’ll provide greater financial independence for individuals and give everyone the same opportunities, whether they’re an institution or a family of four. That access will be granted by the intersection of technology and regulation – and there’s nothing democratic about that. 





Nothing in this article constitutes financial advice or guidance. The content in this article is an opinion and is for general information purposes only. This article is not intended to be relied upon to make financial decisions. It is not intended to be financial advice. The value of your investment can go up or down so you may get back less than your initial investment. The article may contain links to third-party websites or resources. Hedgehog provides these links and resources only as a convenience and is not responsible for the content, products, or services on or available from those websites or in those resources, the links displayed on such websites or the privacy practices of such websites.‍

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