THE PATH TO LIQUIDITY: EXPLORING STRATEGIES FOR PRIVATE COMPANIES

Morgan Stanley at Work is helping to create a new roadmap for private and public companies seeking to generate liquidity

The route to IPO is a complicated one – especially given the current climate, as the economy slows and companies are under increasing pressure to scale while maintaining more modest financial constraints than they were previously afforded.

When a private company seeks to go public, it usually means one of three things: firstly, a company is seeking to raise capital; secondly, its board is planning to provide liquidity for investors and employees; and, finally, there’s a desire to raise brand awareness and strengthen market position in the eyes of potential customers.

The route to an IPO has often been seen as a key milestone in a company’s development in the global marketplace.

But in recent years – helped along by some regulatory changes and market factors – many companies are choosing to delay their route to the public markets and instead work on accessing capital through venture capital and growth equity investors to maintain their private company status.

Capital in private and public markets

According to Kevin Swan, Co-Head of Global Private Markets for Morgan Stanley at Work, these days the average time for a startup company, from launch to make the move to go public, is now over 12 years.

Swan, who studied as an engineer specialising in mechatronics – a multidisciplinary field that exists at the intersection of mechanical, electrical and computer engineering – got swept into the financial world through his early career experiences in startup companies. The path led him into venture capital and later to a company called Solium Capital, which was then acquired by Morgan Stanley in 2019.

Swan’s background has been instrumental in his understanding of the various reasons underscoring certain companies’ decision to choose an IPO route or remain as private entities.

The delay in going public, he explains, is mainly due to changes in the regulatory environment in addition to the flow of capital from public to private markets. This has resulted in private companies being able to raise significant capital without having to go public.

“Over the past decade, we’ve seen increasing amounts of capital flow into the private markets, and we’ve encountered several other factors that have led to this dynamic situation, where companies are now staying private for much, much longer.”

“Now, the average time to enter the public market for a venture-backed tech startup is much longer and these companies are valued in the billions, many in the tens of billions.

Furthermore, some are able to raise enough private capital to not even necessarily need to pursue an IPO and rather enter the public markets through a direct listing.”

Even though it may take a company several years to reach the point where pursuing the public markets is a possibility, preparing for that process requires careful planning. Alternatively, while a company may wish to remain private, it may need to address its equity structure and liquidity strategy to ensure it remains an attractive option for its investors and employees as well as navigate the current economic climate.

Morgan Stanley at Work reshaping private markets liquidity

Although IPOs are generally considered the ultimate liquidity event, private capital markets are continuing to gain momentum in terms of investment interest. As a result, many companies are able to generate the funds required to provide employees with some liquidity on their equity packages, without going public.

These types of events, however – and the management of successful equity programmes – require considerable groundwork to be viable.

And that’s where Morgan Stanley at Work comes in: a division of Morgan Stanley that is focused entirely on private and public company share plan administration solutions that empower companies in providing employees workplace financial benefits.

Their offering covers equity management, retirement solutions and financial wellness. For private companies wanting to maximize the benefit of their equity programmes, Morgan Stanley at Work offers a number of liquidity solutions.

Morgan Stanley’s day-to-day operations primarily consist of investment banking and financial services, so offering solutions that aid in the path to the public markets beyond raising capital has been a natural progression. As a global corporation, it is uniquely positioned to provide an equity management system for the private market that can facilitate recordkeeping, transactions, and money movement.

“If you're a public company, that infrastructure already exists in the form of transfer agents and clearing brokers, where you can easily buy and sell stocks in a public company online or through your financial advisor,” Swan says.

However, in the private marketplace, this can be more of a challenge, as historically speaking, there’s never been a highly sophisticated infrastructure to provide easy liquidity solutions. Morgan Stanley at Work is taking a progressive approach to solving that challenge by building a trading infrastructure and transaction execution framework that caters to private markets and is designed with an issuer perspective.

Specific protocols for private companies

Unsurprisingly, the private markets don't operate in the same way as public markets. Regulation is quite different, and the private investor community often has different objectives and time horizons than public investors. Morgan Stanley at Work offers

Kevin Swan

TITLE: CO-HEAD OF GLOBAL PRIVATE MARKETS

INDUSTRY: FINANCIAL SERVICES

LOCATION: ALBERTA, CANADA

Kevin Swan is a Managing Director of Morgan Stanley in Wealth Management. He is Co-Head of Global Private Markets for Morgan Stanley At Work which delivers equity management, liquidity, and workplace solutions to private companies. He joined Morgan Stanley through the acquisition of Solium Capital where he served as the VP of Corporate Development.