Liquidnet Close to Launching Trading in Private Shares
February 21, 2013
Liquidnet said Wednesday that the platform that it has been working on for more than a year to allow trading of shares between privately held companies and institutional investors is now “substantially complete.” The first action should come before this year is out.
"Our hopes are that you will see activity this year,'' said chief operating officer John Kelly. "We would expect the story to tell itself.''
Liquidnet, which is known for allowing institutional investors to anonymously arrange trades in large blocks of public stock, will be entering a market that has been pioneered by startups such as SecondMarket and Sharespost. The exchanges try to provide an outlet for emerging companies such as Twitter, Groupon or Buzzfeed to let employees or early investors cash out part or all of their stakes when there is not a public market for their shares.
Kelly would not say which or how many companies might use its mechanism for trading shares with its base of mutual fund and other institutional customers. But, he told Traders Magazine, there is "a substantial list of prominent emerging companies that are actively interested'' in the technical platform that Liquidnet has developed to facilitate such pre-initial public offering trading.
Under Liquidnet’s approach, the privately held company would control the trading, aggregating the shares of initial or new employees as well as investors and then arranging sales to institutions.
The company announced the creation of its Private Shares Group in late 2011. The company hired Lou Kerner, a former managing director of Wedbush Securities, to head the group.
The company also hired Kerner colleague Michael Silverstein from Wedbush, leading a legal spat between Liquidnet and Wedbush. Wedbush alleged Liquidnet was appropriating trade secrets with the hires.
Kerner left Liquidnet, after three months on the job.
The development of the trading platform took place through 2012, according to Kelly, under the auspices of the six-person Private Shares Group.
Now, Liquidnet is ready to cash in, treating private shares as a “new asset class,’’ in Kelly’s book.
"In the old-style dotcom era, companies were formed, they went public and the alpha was generated post-IPO,’’ Kelly said. Now, though, "a great deal of the alpha is being generated pre-iPO.’’
Facebook is the classic example, with institutions clamoring for shares long before its ill-fated IPO in May 2012. That IPO was priced aggressively, but technical snafus marred the opening and the price of shares fell radically from the $42 a share price set in the Nasdaq Stock Market’s opening cross.
That begs comparison to the initial public offering of Web browser pioneer Netscape Communications which sought liquidity for its early investors and employees by going public in August 9, 1995. On its first day of trading, Netscape shares shot up $28 to $75 each.
Companies now, though, say private longer, regard IPO markets as less hospitable, are less interested in putting their fate in the hands of ‘strategic buyers’ and generally want to control more of their destiny, said Kelly.
So Liquidnet’s platform will be a way to create what it is known for in block trading: liquidity.
This "will enable the companies themselves to manage and facilitate the sale of private shares from existing investors or employees to institutional investors,'' he said.
Liquidnet’s customers include 700 mutual funds and other asset managers which control more than $12 trillion in stock.
“We've created a mechanism that provides a differentiated institutional scale solution that matches up with a very specific, well articulated need of the buyside community,’’ Kelly said. “How do I capture that alpha, pre-IPO and how do I avoid the problems of trying to buy stock in an IPO?”
No approval from the Securities and Exchange Commission is needed for Liquidnet to proceed, he said. These will be agency-brokered transactions under existing rules for moving unlisted shares.
Liquidnet, however, is adhering to all relevant SEC and Financial Industry Regulatory Authority regulations, in the launch.