The Private Market Is Hot Hot Hot
As such technology stars as Facebook, Zynga, and Groupon hold off on IPOs, their delays have created even more business for private stock markets, such as SecondMarket. The trading service, which connects private shareholders with buyers, said transactions in the fourth quarter hit $157.8 million, more the double the $75 million recorded in the third quarter.
The increase in the dollar total of transactions reflects both a jump in participants, sellers as well as buyers, and an increase in the prices of shares. SecondMarket doesn't talk about pricing, but the number of participants more than doubled in the fourth quarter, to 35,000, from a little more than 15,000 in the third quarter.
Rising prices have increased the total implied value of the companies. For example, a private auction of Facebook shares on SecondMarket this month reportedly made the company worth some $70 billion, with prices hitting $28.26 per share, up from $22.75 in a previous auction last month. Private shares of LinkedIn have been selling at $30 each on SharesPost, another secondary exchange, giving the company a valuation of $2.9 billion. According to Nyppex, a secondary private equity adviser, the total value, based on sales in private trading markets, of Facebook, Groupon, Twitter, and other startups rose 54 percent from June to December last year. That helps explain some of the interest in the market: Share prices are rising faster than either traditional venture capital returns or the Standard & Poor's 500 index (MHP). The exploding valuations have, as my colleague Mathew pointed out, a whiff of a bubble about them, but it's confined largely to private markets for now.
Rising Regulator Interest, Too
Since its founding in April 2009, SecondMarket has overseen more than a half-billion dollars in private transactions. The strong growth of SecondMarket and SharesPost underscores investors' interest in private shares, especially in companies that aren't particularly eager to go public. Also, the government is taking a look at these markets. The Securities and Exchange Commission is reportedly seeking information on private transactions of Facebook, Twitter, Zynga, and LinkedIn shares.
SecondMarket said that in the fourth quarter, Facebook accounted for 39 percent of transactions. Meanwhile, LinkedIn represented 7 percent of transactions, followed by Etsy, with 5 percent, and Chegg and Epocrates at 2.5 percent. In the past, shares have been sold chiefly by former employees, but SecondMarket said that in December, current employees became the largest group of sellers. Among buyers, venture capital funds accounted for more than 40 percent of completed trades, but hedge funds, asset managers, and secondary direct funds have emerged as other important buyers of private shares.
Goldman Sachs's (GS) $450 million investment in Facebook and the $200 million that Twitter pulled in from such investors as Kleiner Perkins illustrate the changing dynamics for hot startups. With no shortage of late-stage funding, private market trading allows hot companies to remain private longer."The cachet of going public has clearly diminished from what it was 10 years ago, and instead of rushing to file, they are delaying," said Seth Levine, managing director of the Foundry Group, on a conference call Thursday to explain 2010 full-year and fourth-quarter venture capital data from the National Venture Capital Assn.
Postponing an initial public offering may be good for founders, who want to maintain some control and avoid the scrutiny that comes with an IPO, but it doesn't always help employees and investors looking to cash out. That's why SecondMarket is finding success: It's tapping the desire of private shareholders to sell and matching it with investors looking to get a piece of the hot new startup.
Trading isn't limited, however, to providing sellers an exit. Sales of LinkedIn shares show that buyers are anxious, as well, to get in on startups before their public offerings. Interest is also high in Groupon, which recently spurned Google's (GOOG) advances and now appears to be readying an IPO of its own. Even with added government scrutiny and competition from electronic trading platform Xpert Financial, the private markets will most likely continue to thrive as investors look for ways to jump into the fray.
Also from GigaOM