With SecondMarket acquisition, Nasdaq moves closer to liquidifying private shares market

27-Oct-2015

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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.







Nasdaq (NDAQ: NSQ) announced that it would acquire private transaction platform, SecondMarket. Founded in 2004, SecondMarket was the 2nd most active private tender market in the US. The company’s primary business is providing liquidity for employees in private companies to conduct private tenders to sell their shares, while providing their employers control over the frequency of the process and who gets to buy/sell shares.

Public markets cooling, hot private markets

In 2014, there were 211 $40M+ growth rounds – just about one per day. In contrast, there were 15 US IT venture-backed IPOs with offerings greater than $40M last year, slightly more one IPO per month in 2014.

This acquisition comes amid a tepid market for tech IPOs. Public tech listings have fallen this year to the lowest point they’ve been in 6 years. Indeed, private companies are raising massive amounts of capital from private sources. Tomasz Tunguz, a venture capitalist, did the math on public/private markets disparity and it’s staggering.

There are a variety of factors behind the drop in successful tech companies deciding to publicly float their shares. Jeremy Kopelman of First Round Capital calls this the “private IPO phenomenon“.

According to the venture capitalist:

In my opinion, there isn’t nearly enough focus on “low frequency trading.” Public companies reprice daily. Private companies don’t have to reprice for years on end.

One key benefit of low-frequency trading in private companies is a long-term focus. It removes arbitrary time constraints on growth and profits. By relying on private financing events as “comps,” we risk pricing new financings (and creating new unicorns) based on stale valuations.

With public transactions cooling, Nasdaq has made it clear the exchange is looking for more growth markets. Nasdaq established a partnership with SecondMarket’s larger competitor, SharesPost, in 2013. The partnership, called Nasdaq Private Market, never really found a lot of traction and Nasdaq reported it would be buying out SharesPost’s stake in the venture.

With the run-up in funding rounds and valuations on the private market, many companies are turning to tender offers to allow employees to take some cash off the table in a controlled manner, set and managed by the company.

“As companies extend their pre-IPO lives, they face increasing pressure to provide liquidity to employees and early investors,” said Bill Siegel, CEO of SecondMarket. “Our combined offering strives to give private companies a comprehensive, company-controlled solution to attract and retain talent, while also providing tools to effectively manage their equity ownership and secondary liquidity for their employees and shareholders.”

facebook trades in private shares

SecondMarket and SharesPost both saw their businesses enter a growth period as Facebook ramped up its business on the social network’s path to IPO.  Facebook was not only a driver but it was a huge percentage of the private stockmarkets’ business. After Facebook went public, SecondMarket decided to focus not on one-off transactions but more on the tender offer process, which companies lead and control.

SecondMarket has facilitated over 70 tender offer programs and processed over $2.5 billion in transaction volume. Another player in the market, startup EquityZen is competing over similar business and currently has close to $30 million of private stock available for sale on the platform. The advent of equity crowdfunding was also seen as a way for startups and private companies to conduct “private IPOs” and sell stock to the general public. True openness hasn’t happened because of concerns over existing regulation and a reticence by companies to partake of the new frameworks created by the JOBS Act of 2012 and Regulation A+.

Regardless of how this plays out, Nasdaq is positioning itself to play a major role in the trading of private company shares.

With SecondMarket acquisition, Nasdaq moves closer to liquidifying private shares market


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