The pandemic caused widespread disruptions to global supply chains, leading to shortages and supply shocks for many goods. Although not a physical good per se, we see a similar thing happening in the private placements market.
In the pre-pandemic environment, private placement deals were already being churned out at near full capacity. But now, traditional private placement processes (the “supply chain”) have been hamstrung by pandemic restrictions – all while demand continues to tick up. This “shortage” is a huge missed opportunity.
Why has this happened – and how can organizations capitalize on this missed opportunity?
Friendly Regulations Supports Growing Demand
In recent years, capital raising regulations have become much friendlier to private placements. Look at Reg-A and Reg-D offerings, which are essentially private placements exempt from registration requirements. In 2020, the SEC:
- Increased the maximum offering amounts for Tier 2 offerings under Reg-A to $75 million from $50 million
- Doubled the maximum offering amount for Rule 504 offerings under Reg-D from $5 million to $10 million
- Made it easier for issuers to verify the accredited status of repeat investors
- Modified the criteria of accredited investors to include investors with certain professional certifications and designations, or who qualify as “knowledgeable employees”. This has expanded the pool of those who can participate in Reg-D offerings
Even prior to these amendments, amounts being raised under Reg-A and Reg-D had already been on the rise. Reg-D, in particular, has been extremely popular – with more capital raised under this regulation compared to public equity and debt.
These amendments will no doubt boost these numbers even further. It is also worth remembering that Reg-A and Reg-D don’t even account for the full scope of private placements – there are also the private placements that do register their securities to include. We even see larger institutions taking an interest in the crowdfunding space, thanks to the substantially increased offering limits under Reg-CF from $1.07 million to $5 million.
And such private placement-friendly regulations don’t just apply to the US. In Canada, for instance, the Ontario Securities Commission recently made it easier for investors to participate in global private placements by removing conflict of interest disclosure requirements.
Accommodative Market Conditions Favor Both Investors and Issuers
Regulations aside, market conditions are also supportive of private placements. For issuers, the market is flush with liquidity. Meanwhile, borrowing costs have never been lower. As for investors, those who have the financial means to participate in private placements are better off than ever.
For instance, take the number of accredited investors. In 2013, about 10.25 million American households could qualify as accredited. In 2019, that number has surged to 13.67 million – over 10% of all households. And this is before the expansion in the accredited investor criteria.
This should come as no surprise. Large increases in both real estate and equity values have strongly benefited asset owners. On top of all that, those who could qualify as accredited investors in the first place were also more likely to have been protected from pandemic-related job losses.
In tandem, these accommodative market conditions and friendly regulations mean demand for private placements has never been higher. But while the pandemic has been a positive for demand – it has been a negative for the processes that must cater to said demand.
Pandemic Disrupts Private Placement “Supply Chain”
Private placements have traditionally relied on manual, paper-based processes. Although sub-optimal, they were still able to meet the demand for private placements – even if just barely. The pandemic changed all that. While demand soared, pandemic restrictions kneecapped these traditional processes.
Wet signatures were no longer feasible. Work-from-home mandates meant back-office teams had an even harder time collating subscription documents and ensuring they were in good order – with multiple back-and-forth steps usually needed. Deal updates may have been delayed. And getting investors properly onboarded became an even greater hassle – especially on deals with more investors. The chances of losing prospective investors due to a lack of client-friendly tools and processes are significant.
A Scramble for Private Placement Automation Solutions
These dual forces of increased demand and slower processes have led to a scramble for solutions that can scale without requiring in-person contact. Even those that only offer a very low level of general automation – such as DocuSign – are increasingly being used.
However, these are “band-aid” solutions that are used to try to cover up near-term operational deficiencies – rather than provide substantial long-term value. Some institutions may even be anticipating a full return to office so that they can once again rely on the very same private placement processes they used before the pandemic.
But this is a short-sighted perspective that neglects the real opportunity presented by the current situation.
An Opportunity to Meet the Growing Demand for Private Placements Through Specialized Solutions
The data points toward the demand for private placements only continuing to increase. Even with a full return to office and removal of all pandemic restrictions, it seems unlikely that these outdated processes can keep up with the demand. On top of that, more and more employees are demanding remote or hybrid work options. Companies which enforce a mandatory return to office policy may pay the price in talent.
A far better alternative is to implement scaling solutions specifically designed to cater for private placements. And that’s exactly what we offer here at Katipult. Our solution empowers financial institutions to streamline investor onboarding and quickly execute subscription documents – including instant checking for “not-in-good-order” documents and automated updates to investors.
The ultimate result – a smoother experience for investors, the ability to handle greater private placement volumes (with minimal additional resource spend), and a powerful competitive advantage that enable you to win more market share.
We’ve already helped Tier-1 clients like Raymond James, Canaccord Genuity, and TSX Trust Company grasp this opportunity.
If you would like to explore how we can do the same for you, contact us to learn more.