Lots of corporate balance sheets these days are saddled with the dead weight of securities suddenly rendered illiquid by the credit crisis. Getting rid of them can be a nightmare in the public markets—so at least some investors are turning to private ones.
Such private trading platforms have blossomed lately, since they offer a path to convert illiquid securities into cash. Last summer, for example, Oaktree Capital Management made headlines when it raised $880 million in private equity. The bigger story, however, was the venue used to raise that money: Goldman Sachs’s Tradable Unregistered Equity (GSTrUE) platform, the first marketplace for private placements, launched in May.
Similar platforms have cropped up since then, including a revamped version of Nasdaq’s Portal, Bear Stearns’ Best Markets exchange, and Opus-5, a joint product of Lehman Brothers and seven other financial firms.
The platforms are generally open to private investors, as well as a select number of publicly traded companies. Unlike the public markets—where investors trade shares of companies registered with the Securities and Exchange Commission—private trading platforms facilitate the trade of illiquid and unregistered securities to a limited population of institutional or accredited investors.
Both types of markets have their pros and cons. Publicly traded companies enjoy access to a larger pool of investors and active trading, which increases the liquidity of their stock and the company’s access to capital. On the other hand, public companies are beholden to rigorous and costly financial reporting demands that the private marketplaces do not require. And as today’s economic climate proves all too painfully, buyers can flee the public markets quickly, stranding companies with assets or liabilities whether they want them or not.
The variety of illiquid instruments includes restricted stock, warrants, convertible stock, private-company stock, auction-rate securities such as student-loan investments and municipal offerings, and securities covered by Rule 144A of the Securities Exchange Act. Under 144A, private companies, very wealthy individuals, and institutional investors may resell debt and equity without registering with the SEC, provided the transactions are executed through qualified institutional buyers that hold investments totaling at least $100 million.
“All told, the various asset classes categorized as illiquid securities represent a market totaling trillions of dollars.”
— Barry Silbert,
CEO,
Restricted Stock Partners
All told, the various asset classes categorized as illiquid securities represent a market totaling trillions of dollars, says Barry Silbert, CEO of Restricted Stock Partners, which specializes in solutions for illiquid securities.
This isn’t to say private trading platforms will be any contender to the public markets such as the New York Stock Exchange or Nasdaq, Silbert says. Columbia Law School Professor John Coffee agrees. After all, he says, “the public marketplace offers access to much larger growth and more capital.”
Coffee
For their part, private platforms collectively provide an organized marketplace that can make illiquid securities a little more liquid. Private companies in particular benefit from increased trading of their stock, which in turn facilitates a greater capacity to raise the capital to go public. For companies that want to stay private, private platforms offer a marketplace to sell their stock without the financial-reporting burdens of publicly traded companies.
Other users of private trading platforms include hedge funds, accredited individual investors, corporate insiders, and private-equity firms. Venture capital funds have also become some of the heaviest users of private platforms recently, since the market for initial public offerings is slim and private trading offers a welcome alternative cash-out strategy.
Silbert
Mid-sized public companies can also find some use in private trading platforms. Silbert’s company, for example, operates the Restricted Securities Trading Network. It serves more than 700 institutional investors who collectively hold $200 billion in assets. According to Silbert, the lion’s share—around 90 percent—of the trades they execute is in unregistered securities of public companies, such as restricted stock.
While private trading platforms have proliferated in the last year, don’t expect the boom to continue. Instead, fewer, larger platforms with greater trading capacity are proving a more effective medium for trading illiquid securities.
Late last year, Nasdaq joined 12 investment banks to form the Portal Alliance, a platform facilitating the trading of Rule 144a securities. The Alliance will include Goldman’s GSTrUE and the Opus-5 platforms, and serve as a trading forum strictly for securities under Rule 144a. According to John Jacobs, executive vice president of Nasdaq, the firms hope the alliance will lure customers (that is, investors) with a better pricing mechanism, since they will now have access to trading histories and other information from other investors—information that they previously relied on a single broker-dealer to provide.
Jacobs anticipates the primary users of the platform will be the same institutional investors who trade in the public markets, who see this private platform as an opportunity for alternative exposure to different investment instruments, as well as early education on the early-stage companies that will eventually go public. The Alliance members are currently negotiating their agreements with the SEC and plan to launch the platform next quarter.
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