“The public capital markets are broken,” Adam Oliveri, Managing Director for SecondMarket, told commercial lawyers at the ABA Business Law Sections annual meeting in Denver last weekend. SecondMarket is one of the new centralized sales platforms for illiquid assets.
Here are some indicators of what’s wrong with the capital markets now:
- The number of public companies listed on major U.S. exchanges has fallen from over 8,000 at the turn of last century to below 6,000 today.
- Average annual IPOs have plummeted from 540 before the tech bubble burst, to 200 IPOs earlier this decade; the Valuation Advisors Lack of Marketability Discount Study counts only 36 in 2009.
- “Time-to-exit is a joke,” Oliveri says. Angel investors’ capital is locked up; VC funds can’t sustain historical returns; ex-employees still hold shares in their former companies; and current employees (such as Facebook founders) have sacrificed salary for an IPO that statistics suggest may be a very long time away for the vast majority of them.
Enter SecondMarket and similar private exchanges such as sharespost (called the “Craig’s List” for PE assets) and Portal Alliance (trading in Rule 144 restricted securities). “Capital, resources, and people have been pouring into this space,” Oliveri says, permitting partial exits or “private IPOs” to take place. After its 2009 launch of the Private Company Market, for example, SecondMarket facilitated 100 transactions for $250 million of private stock; current listings of private company stock for sale now top $200 million.
So many questions, so many risks. Who are the buyers and sellers? What financial information/due diligence/research do they rely on? What SEC exemptions apply? Do private sales take place at discounted values (for lack of marketability); or are they enhanced by a “posturing” premium for access to private stock (such as Facebook) the buyer wouldn’t otherwise have? Bo Brustkern, Managing Director of Arcstone Partners, told ABA attendees of a recent “live” case that posed a substantial valuation problem: The CEO of a private company, whose common stock was recently valued at $0.30 per share for 409A purposes, was leaving the company — and said he would sell his 3,000,000 shares on a private exchange for $2.00 per. “How does a second market sale of private shares affect 409A values going forward?” Brustkern asked. Look for all answer and more comments from Brustkern, et al., in the next (June 2010) Business Valuation Update™.