Liquidnet, the dark pool provider, has announced it will launch a venue for the trading of privately held companies.
The move highlights how financial services firms see private companies ‒ especially in the tech sector ‒ as a new and rich revenue feeding ground. Although specialty firms SecondMarket and SharesPost have largely had this business to themselves, others have shown keen interest.
In January Goldman Sachs orchestrated a sale of Facebook stock to some of its overseas clients. And earlier this month Cantor Fitzgerald launched a private company division to connect its clients with private company stock, private real estate trusts and private equity and hedge fund investments.
Liquidnet is one of the largest operators of dark pools, which allow institutional investors to trade large blocks of stock without publicity during the trade, keeping their actions from affecting share prices in the process.
Last year Liquidnet also started to offer capital market transactions, such as corporate share buybacks and IPOs. The IPO market, however, has remained thin for a number of reasons, including the fact that companies are taking a longer time to go public – often as long as 10 years – according to the National Venture Capital Association.
There are fewer opportunities for investors to make money on IPOs. But companies such as Facebook and Twitter may need additional money, whether for operations or to provide liquidity to early investors or to employees with vested shares or options.
Not all the companies are so high profile, either: online advertising software vendor Clickable just got a $12 mn round of funding from American Express.
The demand for liquidity is why so many in financial services are trying to carve out an area for themselves. Liquidnet already has extensive relationships with institutional investors, which private companies interested in liquidity will find attractive, and the company has said it will focus on such transactions.
Liquidnet has hired Lou Kerner, formerly vice president of equity research at Wedbush Securities, where he focused on social media and e-commerce, to head the group.
Before his time at Wedbush, Kerner was an entrepreneur who was involved with the .tv Corporation, which licensed the .tv top-level internet domain from domain name operator Tuvalu.
He also spent some years at Merrill Lynch and Goldman Sachs as a media equity analyst, giving him a background in some of the industries that are most likely to be interested in an outlet for private equity.
[Article by Erik Sherman, Inside Investor Relations]