Introducing Texture Capital / A Tale of Two Markets

The US public equity markets are the largest and most liquid in the world. Every day around 7 billion shares representing over $300 billion in notional value change hands, executed across an interconnected network of 13 public exchanges and dozens of dark pools and alternative trading venues, with execution speeds measured in micro-seconds. The market is highly transparent, and trades settle smoothly in two business days.

However, the public markets are not the only source of capital to US companies. In fact, the market for private securities is massive and growing with $1.8 trillion in Reg D securities issued in 2017[1], about two thirds of which were equity securities. This contrasts with just $35.5 billion raised through initial public offerings[2] that year.

Source: Texture Capital

A large portion of Reg D offerings are pooled investment vehicles such as hedge funds, private equity funds and venture capital. Even when we strip these out, we see that capital raised by private companies is approximately double that raised in IPOs.

And yet virtually all of this capital markets activity is occurring without any of the technology or  market infrastructure that underpins public markets. Securities are recorded in book entry form with ownership records stored in Excel spreadsheets or the filing cabinets at lawyers’ offices.

Liquidity in the secondary market is severely restricted by the lack of transparency and the complex array of regulations that restrict the resale of these securities. While some trading does occur across a number of disparate private markets and specialist OTC desks, the trades are infrequent and characterized by high costs and wide spreads. In addition, this lack of liquidity results in securities being offered at a ‘discount for lack of marketability’[3] estimated at between 10% and 30%.

At Texture Capital we see this as a tremendous opportunity to create a market structure from scratch, leveraging the most advanced and revolutionary technology available. Texture Capital will deploy blockchain technology to facilitate the issuance of digital securities - also known as security tokens - enabling increased transparency, auditability and accountability for investors, issuers and regulators. Smart contracts can programmatically enforce compliance with securities regulations, removing frictions leading to increased liquidity in the secondary market, and reducing the liquidity discount.

With companies choosing to delay going public, private markets will continue to grow. Recognizing this institutional investors are increasing allocation to private securities. A recent study by Blackrock[4] showed that over two thirds of institutional investors in the US and Canada planned to decrease allocations to public equities while 53% planned to increase allocation to private equity markets. At the same time the SEC has indicated they are keen to explore ways to give main street investors access to private markets[5].

These competitive dynamics underscore how important it is to develop a robust market structure for the private markets. Blockchain technology and digital securities will be instrumental in transforming and modernizing these markets. The distributed ledger will create a much needed layer of transparency around securities ownership and transaction history, and provide for improved regulatory oversight, while ensuring a fair and orderly market that protects institutional and retail investors alike.

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 If you would like to learn more about how Texture Capital intends to revolutionize market structure with digital securities, please reach out at info@texture.capital or follow us on LinkedIn and Twitter.

[1] https://www.sec.gov/files/DERA%20white%20paper_Regulation%20D_082018.pdf

[2] Source: Renaissance Capital. https://www.renaissancecapital.com/IPO-Center/Stats/Proceeds

[3] https://www.irs.gov/pub/irs-utl/dlom.pdf

[4] https://www.blackrock.com/institutions/en-us/insights/rebalancing-survey

[5] https://www.sec.gov/news/public-statement/clayton-remarks-investor-advisory-committee-110719