By Andy Mukherjee
Why should only the wealthy get to ride unicorns to further riches?
Privately held firms with at least $1 billion in value come with daunting price tags that freeze out ordinary investors. Banks that help unicorns raise money are glad to chalk up a few bulky subscriptions — $1 million and more — from top clients. It works fine with regulators who don’t want the general public to lose their life savings on risky bets.
Were the ticket, say, $1,000, even affluent millennials might want to take a punt on the next Facebook Inc or Uber Technologies Inc without having to wait for a stock market debut. That wait is only getting longer. A sizable chunk of $2.5 trillion of uncalled private equity — dry powder — is with venture capital funds that promising companies can use to delay going public and spread the wealth more evenly.
The status quo is unfair. Until its recent initial public offering, the moneyed folk who would never deign to set foot in an Airbnb Inc. property could buy in, whereas a younger, regular user could not. This gap in access could also be expensive. The “massive downward pressure on wages” that the International Labour Organization has forecast for the near term — particularly for women — could make it harder for millennials to build nest eggs if interest rates remain low for long.
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But the existing setup lacks the technology to make private securities a mass-market product. “Private banks only show deals to clients with net worth above $50 million,” says Oi Yee Choo, chief commercial officer of iSTOX, a Singapore-based digital securities platform that aims to democratize finance by fractionalizing it.
It’s not the first player to do so. San Francisco-based Forge Global Inc. made available unlisted shares of Spotify Technology SA, Snap Inc. and Square Inc. to sovereign wealth funds, family offices and wealth managers. The Peter Thiel-backed firm is now expanding in Asia. The timing is right. Thanks to Airbnb and DoorDash Inc., venture-backed IPOs had a banner 2020, encouraging Asian unicorns to accelerate their own listing plans. The closer the offering, the greater the retail appetite.
Blockchain may offer a way to meet this demand. iSTOX, a startup that counts Singapore’s stock exchange and state investment firm among its investors, is turning securities into tokens on distributed ledgers. These aren’t public and permission-less like Bitcoin. iSTOX tokens have no value in the outside world. Nevertheless, by using them, time-consuming manual processes can be automated via smart contracts — software code that self-executes when conditions are met. A three-day settlement cycle can be shortened to seconds. Bespoke investments can be resized as tiny parcels.
iSTOX, which is regulated by Singapore’s monetary authority, recently gave people access to the world’s first digitized unicorn fund for as little as $20,000. After securing $50 million in Series A funding this week from a couple of Japanese government-backed investors and others, the goal is to create an exchange that will let individuals “participate in the growth of large pre-IPO companies like Grab and TransferWise, for example,” Choo says. The technology can handle a ticket size as low as $500.
Grab Holdings Ltd, which began as a ride-hailing service in Southeast Asia, is now a financial services player with a Singapore digital bank license. UK-based TransferWise has found its niche in offering cheaper international money transfers than banks. If early backers or employees of unicorns can cash out when they want, the benefit of their $1.4 trillion market value may reach more people.
Despite the lure of red-hot equities and the appeal of day trading platforms like Robinhood Markets Inc, the 25-to-40 age group in the US has a slightly higher exposure to cash than older cohorts. The future of work and wages is under a cloud. If millennials’ average $83,000 retirement account balance doesn’t get a return boost, they’ll lag behind wealthier older generations.
In Asia, too, inequality is worsening in ways that will matter for both states and markets, according to Australia and New Zealand Banking Group Ltd. Unemployment is soaring among Indonesia’s less-educated workers, South Korea’s part-time labour force is facing a job crunch, and India’s real wages have cratered. To top it all, “the performance of financial assets is becoming a source of inequality,” ANZ analysts Sanjay Mathur and Dhiraj Nim say.
Before politicians reach for the hammer of taxation to tackle the inequality problem, they should use the mallet of technology. Expectations must be realistic, though, about gains from this kind of investment democratization. Sustained 20 per cent annual returns are increasingly something that only top private equity managers can boast. In the US, the PE industry’s 10-year performance advantage over public markets disappeared in 2019. The US-China cold war and Beijing’s scuttling of Ant Group Co’s IPO — a reining in of “tech, trade and titans,” as Morgan Stanley puts it — might also weigh on future returns.
Singapore hasn’t had much luck in competing with Hong Kong for hot IPOs. But by offering a pragmatic regulatory environment for enterprises that use blockchain — not necessarily for cryptocurrencies but for eliminating inefficiencies in everything from remittances to trade finance and asset management — the financial center is acknowledging a simple reality: When it comes to making (or saving) money, Millennials and Generation Z will expect a fairer deal. They’re the early adopters of tech unicorns’ products. Why should they be the last in line to get rich from businesses they have to explain to their mums and dads?