SpaceX CEO Elon Musk participates in a postlaunch news conference inside the Press Site auditorium at NASA’s Kennedy Space Center in Florida on May 30, 2020, following the launch of the agency’s SpaceX Demo-2 mission to the International Space Station.
JPMorgan Chase thinks it’s found the next hot market for investors: Taking stakes in giant, pre-IPO start-ups from SpaceX to Airbnb.
The investment bank is launching a new team to connect sellers and buyers in the burgeoning market for private company shares, according to Chris Berthe, JPMorgan’s global co-head of cash equities trading. He’s lured Andrew Tuthill, a senior VP from trading platform Forge Global, to head up the new team.
“Many of our clients are looking at this as the next frontier,” Berthe said. “What do you do when markets get so high? You’re going to keep looking at value down the chain, and maybe that means getting involved in companies at earlier stages of their lifecycle.”
More than a decade ago, it was much more common for companies to go public earlier in their development, allowing investors to participate in the rise of winners like Amazon and Google. Then plentiful venture capital funding allowed companies to stay private for years longer, leading to a proliferation of unicorn start-ups. There are now 493 unicorns worth more than $1.5 trillion, according to CB Insights.
But that rise has meant that more investors have been shut out of lucrative gains. Case in point: Shares of Uber still trade below the company’s IPO price from more than a year ago, while Uber’s early stage VC investors have made billions.
That caused institutional investors including hedge funds to ask JPMorgan to source stock in private companies, including the Elon Musk-led SpaceX, Airbnb, Robinhood, Palantir and even TikTok, Berthe said. Tiktok is embroiled in an international controversy over the Trump administration’s demand that it sell its U.S. operations to an American company.
Andrew Tuthill, head of JPMorgan equity private market liquidity (L), and Chris Berthe, global co head of cash equities trading (R).
Source: JP Morgan
At the same time, JPMorgan is seeing more demand from company founders, venture capital funds and wealth management clients to sell their stakes in private companies, he said.
The market for trading private company stock is dominated mostly by boutique brokerages based on the West Coast with names like EquityZen, SharesPost and Forge.
Berthe said he believes that New York-based JPMorgan is the first major Wall Street bank to create a team dedicated to trading private shares. People with knowledge of the operations of Goldman Sachs and Morgan Stanley said that while the firms don’t have dedicated teams, they have been facilitating trades in this market for years. In particular, Morgan Stanley last year acquired Solium, a leading manager of corporate stock plans, giving it access to a wide swath of start-up equity.
Unlike shares in public companies like Microsoft, trading in private company stock is complicated and still mostly the domain of old -school voice trading, versus electronic exchanges that close transactions in seconds. Once a trade is negotiated, JPMorgan has to transfer legal ownership of contracts and get clearance from the start-up, a process that can take weeks.
“The shares are not listed, so whenever an investor buys into those companies, there’s different share classes,” Berthe said. Further complicating matters is that “companies very often include a right-of-first-refusal clause and they can block a transaction between a buyer and a seller for various reasons, generally because of price or because they might have concerns with the buyer.”
Tuthill is tasked with connecting buyers and sellers from across JPMorgan, including investment banking clients, wealth management and trading teams, which should create a deeper market for the asset class.
“Companies are staying private for longer and that dynamic doesn’t look like its changing anytime soon,” Berthe said. “The more the market rallies, the more people are going to want to look at alternatives.”