Will Secondaries Exchanges Gain Ground?
While most traditional secondaries market participants scoff at electronic exchanges’ impact on their strategies, some are engaging with them on behalf of their portfolio companies.
Nasdaq’s recent purchase of SecondMarket – one of a number of platforms that have launched over the years to trade shares in private companies – isn’t expected to impact direct secondaries firms as much as some onlookers might have thought.
While Nasdaq clearly sees it as an opportunity to get its hands on the pre-IPO market, which is growing fast as companies are staying private longer, industry insiders say such platforms don’t affect their strategy or investors much. And Nasdaq throwing its hat in the ring isn’t expected to change that.
“The acquisition is not going to change the dynamics of the market,” said a managing director at a direct secondaries firm, adding that none of the various sites that have launched over the years have done so.
SecondMarket specialises in company-run tender offers and delivers software to issuers wanting to run formal liquidity programmes. Meanwhile other start-ups include SharePost, which provides liquidity to late-stage private growth companies and their shareholders.
Direct secondaries investors and trading platforms operate in the same sphere focused on providing liquidity to holders of shares of private companies. But while these platforms do facilitate access to the market, it’s hedge and mutual funds that benefit from that, while direct secondaries firms prefer to source their own deals.
In the eyes of some of traditional direct secondaries firms, these companies may have actually contributed to the jumbo start-up valuations and to the rise of unicorns, VC-backed companies valued at $1 billion or more.
“We haven’t participated in the auctions of these large tenders for years now,” said partner at another direct secondaries firm. “This market has been taken over by hedge funds and institutions that accept lower returns than firms like ours do.”
In 2014, more than 50 percent of the private tender offers SecondMarket facilitated involved a third-party buyer, and the majority of the buyers were mutual funds, according to the company.
Still, it seems there are new exchanges launched every year, which must mean some investors find value in their offerings.
One way that the ‘traditional’ secondaries players are engaging with these platforms is by using the software for their portfolio companies’ liquidity programmes.
Some direct secondaries firms occasionally run auction processes for their companies on their own, but exchanges like SecondMarket have proven to deliver easy-to-use technology for liquidity programmes.
“Some companies need someone to run their tender offer,” said the first source, pointing to the convenience of using such software. “We’ve hired SecondMarket in the past to do a tender process for one of our companies. It worked well.”
Running regular tender offers provide several additional benefits to portfolio companies both in the short and long term, especially if they end up going public. Companies have to gather necessary financial records and to update their cap table, an exercise that will put them ahead of the game once they file for an IPO.
For companies that wish to remain private, which represent the majority of SecondMarket’s clients, it’s likely they’ll run several tender offers in their lifetime to provide much-needed liquidity to employees, founders or early investors and to be able to recruit the best employees.