Monark Monthly, June Edition

Good morning and Happy belated 4th of July!

June was an interesting month for private markets, with two significant macro level changes occurring that will have a major impact ecosystem. In this edition of the Monark Monthly, I will cover the recent Supreme Court ruling overturning the Chevron Doctrine, the impact of Blackrock acquiring Preqin, and an exciting update from our friends at Sydecar. Let's dive in!

Overruling Chevron Deference

In a series of recent decisions, the Supreme Court ruled 6-3 in Loper Enterprises v. Raimondo and Relentless v. Department of Commerce that among other things, the prior legal opinion from 1984 known as the Chevron Doctrine is overruled. This was a complex case, in a complex court system, so I will try to simplify the timeline and order of events. In 1984, the Supreme court passed a ruling in the Chevron USA vs. NRDC case, which by ruling in the favor of the US government (the NRDC), established a legal precedent known as Chevron Deference. Chevron Deference, effectively says that when congress passes a law that lacks specificity, US courts must refer to the expertise of US federal agencies like the EPA and SEC in disputes involving matters of regulatory enforcement. The basic logic behind Chevron Deference is that federal agencies have subject matter expertise in their field (EPA for the environment, SEC for securities laws etc…) and as such, courts should defer to their opinion. This ruling gave tremendous power to federal agencies to regulate their respective industries as they see fit. The reality is, if Congress tried to include every possible detail and scenario in their laws, most laws would never pass. We can safely assume that the role of interpretation of laws will always need to exist in some capacity, especially to help settle regulatory enforcement actions or disputes. While the precedent since 1984 has been to defer interpreting complex issues of regulation to US Federal Agencies, the Supreme Court has now returned much of that interpretation to the courts.

The Supreme Court has now decided that the Chevron Doctrine is overruled and is unconstitutional. This quote from the ruling highlights the court's position on one of the main arguments involving the role of government agencies: “Perhaps most fundamentally, Chevron’s presumption is misguided because agencies have no special competence in resolving statutory ambiguities. Courts do. The Framers anticipated that courts would often confront statutory ambiguities and expected that courts would resolve them by exercising independent legal judgment. Chevron gravely erred in concluding that the inquiry is fundamentally different just because an administrative interpretation is in play. (Source)” Essentially what the majority opinion is saying is that the role of the US court system is to examine the facts of a case or dispute, consult expert witnesses and determine a ruling. What they are arguing against is the former logic of Chevron Deference, which said “let’s defer all the really complex decision making and interpretation to federal agencies." To simply even further, Chevron said that on matters not explicitly outlined by law, "Courts defer to agencies" now that Chevron is overruled, "Agencies defer to courts."

The overruling of the Chevron Doctrine will have a significant impact on the regulation of financial markets, particularly by limiting the SEC’s ability to interpret congressional laws independent of the involvement of the US courts. Now, companies or industry groups that oppose the SEC’s decisions and enforcement actions (that are not explicitly supported by US Laws) will have the opportunity to challenge those decisions in court. Courts will need to determine whether the Congressional law that the SEC is citing in their enforcement makes an explicit statement about the disputed action, and if not, the courts will now be able to determine precedents for actions unspecified by the laws passed by Congress. I expect this will have a major impact on crypto and digital asset regulations (or lack there-of) and will open the door for industry groups to force clarity from US courts on specific issues/disputes. I don’t necessarily think this ruling leads to a “wild west” of unregulated activity (although some of that certainly has, and will continue to occur), but rather creates the opportunity for courts to establish frameworks and precedent for many bodies of regulatory law across different industries.

Blackrock Acquires Preqin for $3.2B

In recent news, BlackRock, the world's largest asset manager, has acquired private market data provider Preqin for $3.2B. Since the acquisition, Blackrock CEO Larry Fink has made statements that the Preqin acquisition will enable Blackrock to “index the private markets.” The acquisition highlights three core themes of private markets that will be incredibly impactful going forward.

One: The Value of Private Market Data Collection and Aggregation

As the team at Preqin knows, private market data collection and aggregation is a labor-intensive task. Tracking hundreds of thousands of private funds, Preqin has become an expert at data extraction. However, without any regulatory obligation to publicly report holdings, NAV, or file disclosures, accessing the data of private funds is a complex and relatively manual process. The difficulty of this process is in part what values Preqin and their experience in the field at $3.2B. Compared to a Bloomberg like product for public markets, which ingests and disseminates publicly available information and SEC filings, supplemented by analysis, I would relate Preqin's data science team more to an expert team of university level researchers, navigating relationships, dueling incentives and an aggressive set of tools and strategies to access privately held fund data. Other private market data companies like Canoe Intelligence and Caplight have explored providing useful tools as a way to get access to data. Canoe by providing AI powered portfolio analysis tools to LPs, and Caplight by providing a “give-to-get” data model to broker dealers in the Pre-IPO space. Both approaches provide an effective way of solving a core problem for users that enables the data aggregator to access underlying data.

Two: Indexation of Private Markets

The indexation of private markets will inevitably help drive the mass adoption of private market investments. First, by allowing individual investors to access private market returns at lower investment minimums through a diversified investment product. Second, by creating investment vehicles that can be freely traded on an exchange or ATS, that allow for fund level liquidity, while still holding illiquid underlying securities or assets. This model is akin to closed end funds issued by managers in public markets, where the NAV of the fund may differ from the market price of the fund's tradable securities, based on the market dynamics of supply and demand. Introducing liquidity to the private markets through diversified and institutionally managed index products will have a massive impact on accessibility for both retail and institutional investors.

An important note on product structure is that while many reports I have read recently indicate that Blackrock will create private market ETFs, the ETF (exchange traded fund) structure is not conducive to holding illiquid private securities. An open-ended ETF will enlist Authorized Participants (institutions) to redeem and issue new shares to retail investors, which requires the AP to separately manage a basket of securities that mimics the ETFs holdings, a task not feasible if the holdings are private and illiquid securities. Individual investors are not able to purchase shares of an ETF from the fund directly, but rather are required to purchase ETF shares through an AP (generally BOFA, Goldman or JP Morgan). Registered Closed End Invesment Companies on the other hand issue a fixed number of shares directly to investors at IPO, after which shares can trade on an ATS or exchange (if illegible). Shares can trade at a premium or discount, disconnected from NAV, and as such can hold illiquid underlying private securities and assets. So, while Blackrock may well index private markets, they are much more likely to do so using UITs, BDCs or Registered Closed End Funds over the ETF product structure.

Three: Data Wars?

While there is value alone in the ability to properly collect and disseminate private data sets, there is also an interesting dynamic that arises when asset managers are the owners of the source of data. Asset managers like Blackrock have two clear mandates: raise capital and generate returns. Doing better at the second makes the first easier. Having access to proprietary data and information that your competitors don't makes the first a lot easier in private markets. Without public reporting or disclosure obligations, a lot of private market data is heavily reliant on trust and incentive alignment. For an independent data provider, the main incentive of the business is to provide data that is as accurate as possible, so that your clients (investors) can make the most informed decisions. For a data provider owned by an asset manager, do the incentives to provide the most accurate or up-to-date data change? Surely, we can expect Blackrock will take advantage of owning the Preqin data science team to gain a proprietary investing advantage. The fees Blackrock can generate off their investment business will significantly outpace maintaining the independent value of Preqin's data feed, right? Without regulatory checks and balances, private market data may become an industry-wide battle for sources of truth. Data will only become more valuable the closer you can get to the source. Going forward, investors would be wise to both check and verify their private data sources and providers, as well as understand the incentive alignment behind them.

Sydecar reaches $1.1B billion in AUA

In other industry news, our friends at Sydecar announced last week that they have reached $1.1B in AUA across 1800+ investment vehicles. This announcement marks an exciting milestone for Sydecar, highlighting the importance of bringing automation and standardization to the investment product landscape. Sydecar is known today for its SPV product, which enables venture investors and syndicate leads with one of the lowest cost fund admins on the market, providing an automated and standardized approach to everything from fund documents, to money movement and K1 filings. Going forward, Sydecar has the unique opportunity to leverage its technology stack to provide low-cost fund admin services for private and registered funds across different asset classes. Over 85% of the $13T private capital markets today is raised through some form of private or registered fund, which shows the scale of the market Sydecar is helping standardize.

Nik Talreja and I have discussed his vision for the opportunity to use SPVs and intermediary investment funds as a means of enabling investors to access private and generally illiquid assets through vehicles that allow for access at lower minimums and the secondary trading of fund interests. Going forward, I expect Sydecar to play a critical role in the development of a more standardized private market, by automating the process of investment product administration. Importantly, Sydecar has expressed no interest in becoming a marketplace themselves (as Carta attempted to do), but rather, they will play a crucial role providing the necessary infrastructure to power marketplaces and individual issuers. As we welcome both Nik and Shriram Bhashyam to Monark as angel investors, we are excited to continue building alongside Sydecar towards the vision of a more efficient private market.

That's all for now, see you next month!