Navigating the Private Market Maze

Navigating the Private Market Maze

The private investing landscape is fragmented, with countless models, players, and processes working together in a complex web. From brokers to funds, marketplaces, and hybrid systems, the sheer variety can make it difficult to know where to start—or worse, how much you’re really paying.

To invest effectively, you need a clear understanding of how these organizations operate and, crucially, how they make money. Without this knowledge, it’s easy to overpay for a security, miss more cost-effective alternatives, or overlook hidden fees. We’ve seen cases where investors unknowingly paid double what they should have, simply because they didn’t understand how the system worked.

This guide will equip you with the tools to navigate private markets confidently. By understanding the structures and incentives behind these models, you can make smarter decisions and avoid costly mistakes. Let’s break it down.

Why Are There So Many Ways to Invest in Private Markets?

The private market has always been fragmented, and that fragmentation gave rise to the various models we see today. Initially, traditional brokers were the primary players. Each broker operated their own small market, maintaining relationships with different VC funds, company executives, and other stakeholders while relying on personal networks to close deals. Even within the same firm, brokers often worked independently, creating isolated micro-markets. This led to thousands of fragmented markets, each operating with its own pricing, rules, and terms.

Fast forward to today, and while the tools have evolved, the market remains deeply fragmented. New models emerged not to solve the fragmentation but to operate within it. Funds, for example, were designed to pool capital and consolidate buying power, but they didn’t address the broader market’s lack of cohesion. Marketplaces, by contrast, aim to reduce fragmentation by using technology to give investors access to a broader portion of the market. However, the proliferation of marketplaces—each company often building its own proprietary system—has in some cases exacerbated the problem. Instead of creating a unified market, these siloed platforms can perpetuate or even increase fragmentation.

While the market remains disjointed, consolidation is likely over time. Fragmented industries often attract efforts to centralize and streamline operations. In the meantime, however, investors must navigate this patchwork system, making it crucial to understand how each model works. Knowing whether you’re engaging with a broker, fund, marketplace, or hybrid system will significantly influence how you evaluate opportunities, interact with the market, and ultimately make investment decisions.

Brokers: The Traditional Model

In the realm of private investing, traditional broker-dealers have long been central to facilitating transactions. These legacy financial institutions operate much like real estate agents, working closely with clients to understand their specific interests—what shares they wish to buy or sell—and guiding them through the complexities of private market transactions. This approach relies heavily on personal relationships with venture capital funds, company executives, and other market participants to identify and negotiate investment opportunities.

The brokerage industry for private market investing spans a wide spectrum. Major financial institutions like Citi and Morgan Stanley often have brokerage arms dedicated to connecting high-net-worth clients with opportunities to invest in private companies. These divisions are typically part of larger wealth management services, offering clients access to a broad range of private investment options.

On the other end of the spectrum, many independent brokerage firms specialize exclusively in private investments. These boutique firms often focus on specific sectors or maintain close connections with private companies and their shareholders. Regardless of their size, all broker-dealers play an essential role in connecting buyers and sellers in the fragmented private market, offering liquidity for those looking to divest shares and access for those seeking to invest in private companies.

Importantly, brokers require specific licenses to operate legally in private markets. These licenses, regulated by bodies such as FINRA in the United States, ensure brokers meet professional standards and comply with securities laws. For investors, working with licensed brokers provides an additional layer of security and oversight in a market that can otherwise be opaque.

Brokers typically earn their commission as a percentage of the transaction, similar to real estate agents. For instance, if you purchase $100,000 worth of shares, the broker might take a 5% fee, or $5,000, as their compensation. This fee structure incentivizes brokers to facilitate transactions but also adds to the cost for investors, making it important to weigh the value of their service against the added expense.

While this traditional model provides personalized service and deep market expertise, it has its limitations. The reliance on individual relationships and manual processes can make the private market feel fragmented, with access often determined by the broker’s specific network and bandwidth. As the private investing market grows, these limitations have created space for newer, technology-driven models designed to streamline processes and broaden access for investors.

Funds: Pooling Capital

Funds are a cornerstone of private market investing. In their simplest form, funds operate by pooling money from multiple investors—known as Limited Partners (LPs)—and using that capital to invest in private companies. This model underpins much of venture capital, where a VC fund invests in a portfolio of startups, spreading risk and potentially amplifying returns.

However, most individual investors engaging with private markets encounter funds through a structure called a Special Purpose Vehicle (SPV). Unlike traditional VC funds, which invest in multiple companies, an SPV is a single-asset fund. It pools money from various investors to purchase shares in a specific company. This creates a layer between the individual investor and the company, providing a more accessible way to participate in private investments while limiting exposure to just one asset.

One important consideration when investing through a fund is the potential for multiple layers of fees. If a broker facilitates your transaction with the fund, you may be charged by both the broker and the fund itself. For example, brokers typically charge a percentage of the transaction as their commission, while funds have their own fee structures, which may include:

• Markup on shares: Shares might cost $100, but the SPV sells them to investors for $200 to cover costs and generate profit.

• Transaction fees: A percentage-based fee, such as 10%, added to the share price (e.g., $100/share becomes $110).

• Carry: A performance-based fee taken when the investment exits profitably. For example, if shares bought for $100 sell for $200 and the carry is 20%, $20 of the gain goes to the fund manager.

• Management fees: An annual fee, often around 2%, charged on the invested capital until the fund exits.

Some SPVs and funds are run by independent managers, while others appear more like platforms, offering direct access to shares through technology-driven interfaces. In some cases, organizations pre-purchase shares—say, 1,000 shares of a private company—and sell them gradually at a markup to other investors.

The key takeaway for investors is to scrutinize fee structures carefully. While SPVs and funds provide access to private markets, the layers of fees—both from brokers and funds—can significantly affect returns. Understanding how these funds operate, how they source deals, and how fees are structured can make the difference between a savvy investment and an overpriced entry into the private market.

If you want to take a deeper dive into single-layer vs. dual-layer fund structures, check out this guide on fund types. Interested in passive ETF-like index investing in private markets? Learn more here.

Marketplaces: Using Technology to Match Investors

Marketplaces in private investing aim to create an environment similar to a stock market, where buyers and sellers can connect to trade shares of private companies. Companies like SpaceX, OpenAI, and Anthropic might have their shares listed for sale on these platforms, with investors offering to buy or sell at specific prices. However, unlike public markets, where all shares are identical, private markets add complexity. A share of private stock could differ significantly depending on whether it’s common or preferred, includes specific pro rata rights, or is bundled within a fund. This makes marketplaces feel less like a public exchange and more like an eBay for stocks, where you must carefully read the details of each listing to understand what you’re buying.

Marketplaces aim to reduce the inefficiencies associated with traditional brokers. Instead of brokers relying on cold calls, sell sheets, or one-on-one relationship management, these platforms use technology to streamline the process. They display available shares, prices, and transaction terms in a clear, centralized manner, making it easier for investors to find opportunities and for sellers to access buyers. This reduces the friction and manual effort brokers face and helps to speed up transactions.

However, despite their benefits, marketplaces haven’t fully solved the problem of market fragmentation. Many companies have developed their own marketplaces, each with its own set of listings, transaction fees, and available shares. As a result, you may find that one platform lists SpaceX shares while another does not, or that similar shares are priced differently across marketplaces. Instead of consolidating the private market, these platforms often perpetuate fragmentation by creating isolated “mini-markets.”

From a fee perspective, marketplaces can introduce additional layers of costs. Depending on how a marketplace operates, fees might be charged by the platform itself, by brokers posting on the marketplace, or by fund managers using brokers to facilitate transactions. In extreme cases, an investor might pay fees at multiple levels: to the marketplace, to the broker, and to the fund manager. While such stacked fees are rare, this highlights the importance of understanding the full cost structure before investing.

Marketplaces are a significant step forward in providing visibility and efficiency in private markets, but they require careful navigation. Investors should not only compare fees and listings across platforms but also scrutinize the specific terms of the shares they’re considering. While marketplaces aim to simplify access to private investments, their fragmented nature means due diligence remains critical.

Hybrid Systems: Combining Several Models Together

Hybrid systems in private investing combine elements of the traditional and modern models to create more integrated and efficient solutions. For example, you might encounter a broker who works closely with a fund manager within the same organization, streamlining the process and reducing fees between the two. In this setup, the fund makes it easier to pool and deploy capital, while the broker identifies the best opportunities, providing investors with the benefits of both approaches.

Today, hybrid systems frequently mix technology solutions with brokers or fund managers—or a combination of the two. These platforms aim to modernize legacy processes, using technology to reduce inefficiencies and lower costs. In some cases, they achieve drastic fee reductions by optimizing operations and relying on marketplace growth to reduce fragmentation. For instance, certain marketplaces integrate fund offerings and charge little to no fees on those funds, banking on higher transaction volumes to drive profitability rather than relying solely on markup or management fees.

This shift benefits investors by decreasing transaction costs and simplifying access to private markets. Instead of navigating through multiple disconnected systems, hybrid models provide a more cohesive experience. However, it’s still crucial to understand how these systems operate. Fee structures, alignment between the parties involved, and how technology integrates with traditional processes all impact the value investors receive.

Hybrid systems are an essential step toward addressing the fragmentation of private markets, aiming to combine the reliability of legacy processes with the efficiency of modern technology. As these systems evolve, they offer investors new ways to engage with private markets while potentially reducing the barriers and costs that have long characterized these investments.

Know Before You Invest

The private investing landscape offers several ways to engage, each with its own advantages and trade-offs:

• Brokers provide personalized service but often come with higher fees and rely on individual networks.

• Funds pool capital for streamlined investing but can layer on additional costs.

• Marketplaces use technology to increase visibility but haven’t fully solved the problem of fragmentation.

• Hybrid systems combine models to improve efficiency and reduce fees but require careful scrutiny to understand how they operate.

Before making any investment, take the time to understand which type of organization you’re working with and how they make money themselves. Doing so can help you minimize unnecessary fees and maximize your returns.

We’re here to help you navigate the private investing space with confidence. If you have questions, reach out to us at [email protected].

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