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Under the Hood: Transforming Infrastructure for Private Markets

By DTCC Connection Staff | 3 minute read | March 22, 2022

Private markets have seen exponential growth over the last several years, yet the infrastructure has not kept pace to support it. As public markets plan for full straight-through-processing and same-day settlement, the private markets are still struggling to make the leap from spreadsheets and paper processing.

Recognizing this need for modernization in the private markets, DTCC built the Digital Securities Management (DSM) platform, which added to the research and experimentation of Project Whitney. DSM is designed to modernize and digitize the post-trade processing of private markets and is currently nearing the completion of its production phase.

Related: Discover More From the 2022 DTCC Forum

At the 2022 DTCC Forum, Stephen Prosperi, DTCC Director Innovation Strategy & Design, spoke with Darren Cannon, BlackRock Managing Director, Global Alternative Operations; Carine M. Schneider, AST Private Company Solutions, Inc. President; and W. Carson McLean, DTCC Managing Director, General Counsel's Office about the exciting developments and challenges of the private markets.

Normalizing the Unicorn: As valuations climb higher and higher, the term “unicorn”, coined a decade ago for the uniqueness of a privately held startup with a value of over $1 billion, is no longer a rarity. Earlier this year there were 1,000 unicorns globally, and today there are decacorns – and even hectacorns – private companies valued at over $10 billion and $100 billion, respectively.

Diversifying Exposure into Private Markets: As the world’s largest asset manager, Blackrock has billions in private and growth equity investments. Cannon spoke of the huge appetite for private markets exposure that has exploded across platforms and channels and noted the growing trend to diversify exposure into private markets. Still, with too many private companies leveraging one-off tools and spreadsheets to manage their cap tables, Schneider spoke about the importance of purpose-built solutions to service this segment of rapidly growing companies. As crowdfunding has become an alternative to fundraising it has raised the complexity of who actually owns a company, resulting in recordkeeping that is manual, fragmented and opaque.

Burgeoning Regulatory Challenges: While the private markets have seen exponential growth—raising more capital in the past 10 years than the public markets—there is limited regulation, oversight and visibility. The increased attention and importance has drawn the focus of regulators. The SEC recently issued a proposal that would force hedge funds to provide disclosures to guard against conflicts of interest, and next month, they are expected to raise the limit for investing in start-ups, further restricting pooled investors in private markets.

Balancing Investor Access and Protection: Schneider noted that start-ups are risky, but accessibility to investing in them should be improved as some of the best returns on investment come from growth stage companies. For public markets, DTC serves as the primary good control location, bringing improved efficiency to the clearing and settlement of public securities. McLean noted that a common pain point in the private market lifecycle is they don’t have a common good control location, resulting in a challenge for broker/dealers to meet custody requirements and higher costs passed on investors. To help alleviate these challenges, DTCC is seeking SEC approval for DTC (via the DSM platform) to be a good control location, bringing the same efficiencies to private markets as it brings to the public markets.

Bridging the Gap with DSM: Modernization is needed to sustain and maintain growth in the private markets, particularly platforms with interfaces flexible enough to keep up with the accelerated pace of change. DSM bridges the gap to modernization, built on a modern, flexible, cloud- based platform, employing APIs and providing DLT functionality. DTCC continues to drive innovation, developing platforms that are loosely coupled with modern interfaces. As the private markets infrastructure grows and expands, the technology needs to keep up to support private market securities through transparency.

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