How Private Equity Platforms Are Revolutionizing Secondary Market Transactions

The secondary market, or, simply, the “stock market,” is thriving with private equity opportunities, among which platform companies stand out as an investment strategy.

Traditional private equity (PE) deals are infamous for their illiquidity, especially among investors who like having quick access to capital.

Thankfully, the private equity investment platform is here to stay and has already changed the game. Here’s how.

What is a Platform Company?

Platform companies come from private markets, which means they’re not publicly listed. These companies are purchased by PE funds, which in turn invest in them with limited partners (LP) or other institutional investors. The capital raised during the process is often channeled to Mergers and Acquisitions (M&A).

The PE platform purchases other companies from strategic fields that may add value to the initial investment, the so-called “add-ons.” It’s vital to understand that PE firms create platform companies to sell them later for a higher value. Moreover, such investors want returns on their investments as soon as possible.

While promoting organic business growth is possible, M&A operations are typically much faster. In this context, platform companies build their portfolio with investment options that go under the radar of primary market players. So, it’s a great opportunity for pre-IPO investments. Better still, secondary market transactions provide much more liquidity, as investors can cash out their stocks swiftly. It’s a key advantage for investors in a hurry to reallocate their resources.

Game-Changing Advantages

Providing liquidity in a notoriously illiquid investment is a ground-breaking advancement already. Yet, there’s more. The graphics showing the performance of any investment over time show an initial downward curve, indicating the moment when the investment is done, and there are still no returns.

Ideally, this trade line will start pointing north soon, surpassing the initial investment. This Nike-like shape is called the J-curve, representing how long it’ll take for the investment to bear fruit. So, the smaller the curve, the better the investment. It turns out that platform companies provide much quicker gains, thus presenting a much more upward-looking tradeline.

Obviously, investing in PE platforms isn’t free from risks, but some key features considerably mitigate them. These platforms usually have a diversity-friendly approach to portfolio management, where potential losses can be balanced with other investments.

The Revolution Is Afoot

The secondary market volume is expected to reach USD 152 billion by the end of 2025. In this context, the demand for private equity is growing among players in the stock market, fuelling competition. Unsurprisingly, digitization isn’t only a trend or an edge but almost a must-have.

That’s why PE firms have been rushing to implement artificial intelligence and blockchain solutions, looking for exclusive market opportunities and ensuring safety. As blockchain systems gain space in this market, they also create an ecosystem where trading tokenized assets is possible, opening new and exciting investment opportunities.

The regulatory landscape is shifting worldwide as legislators try to bring more transparency to the stock market, a key factor for investor protection. So far, the AIFMD (Alternative Investment Fund Managers Directive) in Europe and the SEC (Securities and Exchange Commission) serve as role models, increasing their oversight of secondary markets. The result can only be more compliant firms and reliable investment options.

PE platforms also bring individual investors into the mix, democratizing access to the stock market. Digitized PE platforms have also made investment easy. These investors can often trade stocks straight from their mobile devices, having nearly the same opportunities as well-established financial institutions. Such platforms will likely become more accessible as smartphone ownership reaches 70% of the global population and continues to rise, just like internet coverage.

It’s easy to understand why there’s a growing demand for secondary market transactions. Macroeconomics is more important now than ever before for investors, as the global landscape is moving fast and, often, unpredictably. In this scenario, liquidity and short-term returns are becoming more attractive.

FAQ

How do PE firms create platform companies?

PE firms create their platforms from companies typically seen as alternative investments. PE firms then purchase those companies and invest in them with limited partners and investors by acquiring other companies to resell them later for capital gains.

What are the key advantages of investing in platform companies?

Platform companies have much more transparent portfolios, and investors know exactly where they’re putting their money. It’s also a safe option because all companies in those portfolios have done due diligence already, which means their data is reliable.