JPMorgan Chase believes it's the next hot market for investors: stake in giant pre-IPO startups from SpaceX to Airbnb.
Chris Berthe, JPMorgan's global co-head of cash equities trading, said the investment bank is starting a new team to bring sellers and buyers together in the burgeoning private company equity market. He has lured Andrew Tuthill, a senior VP of the Forge Global trading platform, to lead the new team.
"Many of our customers see this as the next frontier," said Berthe. "What do you do when the markets get this high? You will continue to evaluate value down the chain, and maybe that means you get exposure to companies earlier in their life cycle."
More than a decade ago, it was far more common for companies to go public earlier in their development, allowing investors to participate in the rise of winners like Amazon and Google. The ample venture capital funding has allowed companies to stay private for years, which has led to an increase in unicorn startups. There are now 493 unicorns valued at more than $ 1.5 trillion, according to CB Insights.
However, this surge has resulted in more investors being excluded from lucrative profits. Case in point: Uber's shares are still trading below the company's IPO price from more than a year ago, while Uber's early-stage VC investors made billions.
This prompted institutional investors, including hedge funds, to ask JPMorgan to raise shares in private companies including SpaceX, Airbnb, Robinhood, Palantir and even TikTok, which are led by Elon Musk, Berthe said. Tiktok is embroiled in an international controversy over the Trump administration's request to sell its US 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 sees greater demand from entrepreneurs, venture capital funds and wealth management clients to sell their stakes in private companies, he said.
The market for trading stocks of private companies is largely dominated by boutique brokers on the west coast with names like EquityZen, SharesPost and Forge.
Berthe believes New York-based JPMorgan will be the first major Wall Street bank to create a private equity trading team. Those with knowledge of Goldman Sachs and Morgan Stanley's operations said that while the companies do not have dedicated teams, they have made it easier to trade in the market for years. In particular, Morgan Stanley acquired Solium, a leading company equity plan manager, last year, gaining access to a wide range of start-up equity.
Unlike stocks in public companies like Microsoft, trading stocks in private companies is complicated and is still mostly in the old-school language trading space, unlike electronic exchanges that complete transactions in seconds. Once a deal is negotiated, JPMorgan must transfer legal ownership of contracts and obtain approval from the start-up, a process that can take weeks.
"The shares are not listed. So when an investor buys into these companies, there are different classes of shares," said Berthe. Another complication is that "very often companies may include a pre-emptive clause and block a transaction between a buyer and seller for various reasons, generally price or because they may have concerns about the buyer."
Tuthill's mission is to connect buyers and sellers from across JPMorgan, including investment banking clients, asset management and trading teams, to create a deeper market for the asset class.
"Companies stay private longer and this dynamic doesn't seem to be changing anytime soon," said Berthe. "The more the market recovers, the more people will want to look for alternatives."