The private markets industry has achieved remarkable growth, reaching $24.4 trillion in assets by the end of 2023. Yet this success masks a fundamental problem: the complete absence of standardization is costing the industry billions in lost efficiency and blocking millions of investors from participating in an entire asset class. In part 2, Talia Klein, Managing Director and Head of Wealth & Investment Solutions at DTCC, explains what it will take to build the shared infrastructure needed to unlock the next phase of growth for private markets.
Read Part 1 Here
Key Takeaways
- Private markets, while growing rapidly, are inefficient and costs the industry billions annually because processes aren’t standardized.
- There is a critical need for shared infrastructure and standardization in private fund markets to overcome operational inefficiencies by using the approach public markets took decades ago.
- The solution will need to be born out of industry-wide coordination and making long-term investments that benefit the ecosystem rather than individual firms.
Learning From Public Markets
Public markets weren't always the well-oiled machines they are today. In the late 1960s, surging trading volumes overwhelmed the paper-based system. Certificates were lost, trades failed to settle and chaos spread through Wall Street. The market was literally drowning in paper.
The solution wasn't for each brokerage firm to build better individual systems. It was to create shared infrastructure, The Depository Trust Company in the United States, that everyone could use. Suddenly, securities could move electronically. Settlement became reliable. The foundation was set for everything that followed.
This infrastructure didn't stifle innovation in public markets; it enabled it, unleashing access for investors in a way previously impossible. Because when everyone isn't allocating their resources to individually build the same basic operational processes, they can focus on what actually differentiates them. Private markets need this same shift. Not because the current system has completely broken down, but because the opportunity cost of not having it is becoming enormous.
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What Shared Infrastructure Actually Means
When I talk about market infrastructure, I mean the boring, yet essential, system that makes markets work. In public markets, this includes things like standardized identifiers for securities, common messaging protocols for trade instructions, and established settlement procedures.
For private markets, it could mean common data standards for fund information, standardized protocols for capital calls or distributions and shared utilities for managing subscriptions and transfers.
The benefits go far beyond just efficiency; shared infrastructure creates trust. When there are clear rules, transparent governance and robust operational standards, participants’ confidence in the marketplace grows. This is especially important for private markets as they open up to broader investor bases. It also enables network effects. The more participants using shared infrastructure, the more valuable it becomes for everyone. This is how you build liquidity and grow ecosystems.
Finally and importantly, it mutualizes costs. Instead of every firm building redundant systems for the same basic functions, the industry pools resources for the non-differentiating activities. This frees up capital and talent for higher value, alpha-generating activity.
The Tokenization Moment
Here's where things get interesting. The emergence of tokenization — representation of fund interests as on blockchain networks — creates a natural inflection point for the industry to coalesce around standards.
Tokenization offers compelling benefits. Digital tokens can be transferred more efficiently than traditional ownership records. Fractional ownership becomes easier to implement, potentially lowering minimum investment sizes. Smart contracts can automate compliance checks that currently require manual review. Secondary trading infrastructure could be built on a foundation of standardized digital assets rather than our current fragmented analog market.
But there’s a crucial point central to solving this problem: tokenization alone won't fix it. In fact, without proper standardization, tokenization could actually make things worse, creating even more fragmented systems and isolated pools of liquidity.
Read more: The ETF Evolution: Unlocking the Future of Investment Opportunities
The power comes from combining tokenization with shared infrastructure. If we're reimagining how fund interests are represented and transferred, we should simultaneously standardize the data and processes around those assets.
What It Will Take
Building shared infrastructure for private markets won't be easy. It requires overcoming entrenched interests, coordinating across competitors and making long-term investments that primarily benefit the ecosystem rather than individual firms.
But I believe it's possible, because I've seen it happen before. Here's what I think it will take:
- Getting everyone to the table. Fund managers, investors, distributors, service providers and regulators all need to be involved in designing solutions and incentivized to make progress. This requires moving beyond competitive instincts to recognize shared interests in market efficiency.
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Starting with the right problems. Rather than trying to standardize everything at once, we should focus on areas where standardization provides the greatest benefit with the least resistance.
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Building for flexibility. The best infrastructure provides building blocks that participants can use flexibly, not monolithic systems requiring wholesale adoption.
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Ensuring fair governance. Governance models that give all stakeholders an appropriate voice and protect against abuse of market position.
The Choice Ahead
Private markets are at a crossroads. We can continue down the current path, making incremental improvements to proprietary systems, gradually expanding access, but remaining fundamentally constrained by fragmentation.
Or we can take a different path. Embrace shared infrastructure as an enabler of growth, using standardization not as a limitation but as a foundation. I won't pretend this is an easy choice. There are real costs to building it, and the benefits primarily accrue to the ecosystem rather than to early movers. That's why it typically requires either collective action or external pressure to make it happen.
Public markets only embraced shared infrastructure after a crisis forced their hand. Private markets have an opportunity to be more proactive; to build what we need before we hit a breaking point. The question isn't whether private markets will eventually adopt shared infrastructure. The question is whether today's market participants will lead that transition or be forced to follow it later.