Capital markets insights

The annual ADISA conference in Las Vegas is always an excellent opportunity to catch up with sponsors, managing brokers and other stakeholders in the alternative investments industry. The conference also had some insightful educational tracks highlighting several challenges we are actively focused on solving for our customers with Katipult DealFlow.

On August 23, 2023, the U.S. Securities and Exchange Commission (SEC) announced a momentous change to the $20 trillion private fund industry. The SEC unveiled a sweeping set of reforms aimed at reshaping the landscape of this segment of the alternative investments sector. These regulatory changes carry far-reaching implications for broker-dealers, private fund managers, and investors.

There has been an increasing trend of private equity real estate sponsors and fund managers embracing technology such as investment platfoms to expand their digital capabilities and distribution channels. An overarching theme of these initiatives is to enhance accessibility for investors and financial advisors to buy, own, and sell real estate investments online.

Wealth Management is rapidly transforming as securities deregulation, disintermediation, investor demographics, technology, and accessibility to new investment products drive fundamental changes to the industry.  As these changes accelerate, financial advisors have to deliver strategies that justify fees and provide a differentiated service for their clients otherwise, they risk losing business to low-cost, self-administered brokerage accounts, robo advisors, and the growing number of ETF options.

Institutional investors stand as formidable pillars, commanding vast pools of capital and exerting a profound influence on global capital markets. These sophisticated and well-funded entities, including pension funds, insurance companies, sovereign wealth funds, and endowments, are pivotal in shaping economies and businesses' trajectories.

In 2019, both Capital One and Empire Life experienced data breaches where cybercriminals gained unauthorized access to systems containing the personal information of over 100 million clients. A few years earlier, in 2014, JPMorgan Chase experienced a significant data breach. Hackers accessed the bank's systems and compromised the personal information of approximately 83 million customers.

As deal activity within capital markets increases, ECM teams are refining processes and upgrading their technology including investment platforms, positioning them to maximize the volume of deals they can run.

In the realm of alternative investments, private placements have emerged as an option for businesses seeking to raise capital and for investors looking for enhanced returns. The agility of a private placement combines the interests of investors and issuers, fostering a symbiotic relationship.

As a leading voice in the digital transformation of the alternative investment sector, we keep a close eye on trends and patterns that we see emerging.  We sat down with Katipult CEO Gord Breese for a Q&A across three broad themes we expect to be notable trends this year; Compliance Changes, Technology, and Investor Demographics.

Hi Gord, and thanks for your time today. As we outlined, we want your thoughts on a few key themes and topics that we expect to be of interest to the investment community this year and into 2024.

Firstly we want to discuss the impact you expect over the coming years from the compliance changes that have recently been introduced.

I’d like to start with some of the regulations around solicitation capabilities. Although Reg 506(B) & Reg 506(c) are well established, please share your thoughts on how investment marketing might evolve for private investments.

The regulations around how investments can be marketed have generally restrictive, meaning broker-dealers and sponsors have had to follow relatively rigid processes to comply with investor solicitation rules. For that reason, we saw many of those organizations constrained in their ability to add new investors to their networks and communities, with most of that growth coming in the form of referrals from existing investors. The rules surrounding solicitation–Reg 506(b), Reg 506(c) and Reg A+ –were introduced in 2013, and in response, investment dealers are now using technology and digital marketing tools to attract and educate investors on investment opportunities.

What sort of impact will this have on investment banks and dealers?

Under Reg 506(c), these firms can offer and sell securities to an unlimited number of accredited investors. Under Reg 506(b), perhaps more crucially, they can sell shares to up to 35 non-accredited investors who meet certain financial sophistication requirements. The investment dealer must take reasonable steps to verify that the investors are accredited or meet the financial sophistication requirements. Still, the possibilities for marketing new deals are very exciting because soliciting new investors is now allowed. 

As a platform that supports private placements, how will this impact Katipult’s customers?

For our customers looking to take advantage of 506(c), we are introducing new capabilities such as DealFlow Marketing. This will enable Equity Capital Markets teams and Financial Advisors to quickly and easily share deal information with a broader pool of investors, enabling more people to participate in new and innovative investment options. We’re excited by this as it aligns with our mission to make private placements more accessible

Moving onto the next topic, what can you tell us about Real-Time Suitability, AML & KYC Checks

Regulators are increasingly comfortable with new ways to resolve redundant and tedious tasks for investors, including suitability and know-your-client (KYC) checks. As a result, there have been increases in the access and use of trusted and reliable data sources which allow for comprehensive approvals on investors in literally seconds. In addition, we’ve worked with our customers to integrate several of these new, fully digital services into Katipult DealFlow, vastly reducing the time it takes to add and set up new investor accounts.For our customers, this means they can onboard new investors faster, leading to an overall more efficient workflow and process.  

My final question on compliance; how will some of the newer regulations, such as Reg A+ or Reg A Tier 2, increase investor participation?

Regulators have historically been wary about facilitating wider retail investor participation in private placements. As a result, many high quality deals were limited to institutional investors and high-net-worth individuals.  Tier 2 of Reg A has changed that significantly and opened up investor participation for capital raises of up to $75 Million for all investors.  There are still some restrictions, and issuers and sponsors need to get approval from the SEC; but, under Reg A+, investors don’t need to be accredited to participate. 

Thanks, Gord. Moving into technology, what are some significant themes that you think we’ll see in the coming year?

I don’t think we can talk about trends in technology without touching on AI.  Since ChatGPT and other generative AI tools exploded into the mainstream at the end of last year, AI has been elevated across public consciousness. 

While we are adopting AI as part of the tools we use to develop our software, the really interesting trend will be how AI  out in the long run across Capital Markets.  As with other sectors, AI will likely offer significant advantages by making task-orientated work more efficientl, enabling us to focus on making more higher value nuanced decisions.

As adoption becomes widespread, the more interesting use cases will come with AI assisting  on more abstract problems. Areas of interest for Katipult are issuer due diligence, syndication management, and how to engage investors the investment process. 

What is your perspective on how that might align with another important tech topic; Big Data?

I think we’ll start to see organizations that have adopted the use of data as a strategic resource –those that collect and manage their investment activity and transaction data and pay careful attention to how its structured–are in a much stronger position to use AI to mine and analyze this data, and capture powerful and valuable insights. Using AI with their data assets will give them a long-term strategic advantage over their competitors. 

That sounds interesting. What sort of impact could this have?

The key to leveraging Data and AI is rooted in how firms can improve their core business processes and customers' experiences. For example, Financial Advisors will be able to help individual clients achieve their investment mandates and provide highly tailored investment solutions based on preference and previous transactions.

Alongside Big Data and AI, what other technology trends do you expect to be significant in the next 12 months?  

We see continued advancement in workflow automation and Smart Messaging. This aligns with the potential of AI to create efficiencies in peoples’ day-to-day work, where tech is increasing productivity by automating processes and tasks, allowing them to focus on the more critical, elements of their jobs.  

Smart messaging–leveraged with the data strategies we’ve already discussed–will deliver powerful capabilities that users are alerted about actions and issues that require their attention and prompt them to act in real time.

Turning to our third theme, investor demographics, what can we expect to see in the near future? 

One of the most relevant trends for private markets is the growth of the accredited investor category. On August 26, 2020, the SEC revised the accredited investor definition to include individuals with particular professional certifications, designations, or other credentials as "knowledgeable employees" of private funds. By making these changes, the SEC effectively increased the number of accredited investors in the US by a multiple of 10. 
Family Offices are also growing, adding to the number of accredited investors. 

So it sounds like more people will be able to participate in private placements.  Presumably, this will mean an increase in the amount of capital being invested?

Absolutely. In the past, private investment opportunities were limited to accredited investors for compliance reasons. Investment firms compete for these investor dollars, so the increase in the number of accredited investors creates significant opportunities in the industry.

Interestingly, the expanded eligibility of accredited investors is happening concurrently with the largest intergenerational transfer of wealth as baby boomers pass assets to their younger family members.

This demographic bubble is the wealthiest generation in history. It is estimated that between $30T to $68T will be transferred  in the United States alone. In addition, we also see that investors are increasingly seeking alternative investment options for their capital. Both trends will result in an enormous influx of capital into private markets.

Ok, we’re talking staggering amounts of money potentially coming into private markets? So how will firms be able to attract investment and tap into that? 

As we touched on earlier, one of the ways we will see is much more aggressive marketing of deals by firms under regulation 506(c).
The regulation isn’t new; it has existed since being introduced as part of the Jumpstart Our Business Startups (JOBS) Act of 2012. However, investment dealers seem to have struggled to implement systems to market private placements to qualified investors, despite expectations from investors for quality digital solutions.

This is one of the reasons why we’re developing DealFlow Marketing. This module enables firms to quickly and easily pass on investment information to relevant parties at speed and scale. 

Thanks, Gord. This conversation has been great and provides plenty to consider for the months ahead.