The Need For Liquidity

The rise in popularity for private company investing must come with the ability to exit

Written by Stuart Lucas co-founder and Chief Executive  Officer of Asset Match

H ere's a conundrum. What do all those

private businesses that have raised

funds through the new wave of

alternative finance do with their

shareholders? Once the companies have got

the cash there is a temptation to treat them

like mushrooms – feed them rubbish and keep

them in the dark.

Crowd-funders are becoming more

demanding, albeit led by more sophisticated

investors. Like their quoted counterparts they

expect access to investor information and regular

updates. Crucially investors want to know how and

when they can expect an exit.

Providing liquidity in unquoted companies

has always been a problem and the regulator,

the Financial Conduct Authority, also raised

concerns on this issue in its consultation paper on

crowdfunding toward the end of 2013. To attract investors,

newly funded businesses often make vague promises of an IPO

(initial public offering) or trade sale in three to five years. Until

then shareholders just have to sit tight unless the management

are willing to buy back the shares. Even then how do you

determine price? Shares in private companies are typically

bought and sold at a value that both parties can mutually agree

on, rather than at a market derived one.

I once found myself in this position and was locked in

a successful private business for over 12 years; with no

transparent mechanism to value my shares I was compelled to

hold on.

PRIVATE ENTERPRISE

There are over 2,500 sizeable private companies with turnover

above £15 million in the UK that have at least 10 shareholders

and many more start-ups with over 50 shareholders. A back

of an envelope calculation puts an equity value of

around £300 billion of tied-up assets. Only a tiny

fraction of these companies will ever go public,

some may find a buyer, more won’t survive.

Shareholders also need to be aware that the

people behind many of these businesses may

have no real intention of providing an exit any

time soon. After all the greatest advantage of

being private is retaining control and making

decisions without having to ask anyone’s

permission.

Share auction services like Asset Match used

to be perceived as the go-to places for delisted

stocks that couldn’t cut it as a public company.

With some companies paying in excess of the

value of the shares being traded to maintain their

listing, it is no wonder they begin to question their

status as a public company. The private market

is also changing. The growth of a nation of angel investors,

EIS schemes and better access to private business investment

opportunities means that demand for a secondary market to

trade illiquid assets is on the rise.

TASTY STORY

Aberdeen based craft brewery BrewDog is a good example

of a one-in-10 crowd-funded success story. It has completed

three ‘Equity for Punks’ share issues since 2009; the latest in

2013 at £95 per share. An early commitment to shareholders

to provide a liquidity event was recently actioned. Buyers

and sellers were corralled in a five-hour auction where 220

investors took part. Participants were able to see the range of

bids and offers which spanned from £25 to £300 and adjust

their orders accordingly. In the end, 118 individuals traded

successfully. The smallest seller sold just one share while the

largest buyer invested over £80,000. At the close, shares were

transacted at £125 per share giving BrewDog a market cap

of just under £150 million. Not bad for a company that was

founded in 2007 and has sourced most of its funds from fans.

Liquidity doesn’t just affect up and coming companies. Any

private business with investors faces the same issue, whether

it is a private equity-backed company, a family business with a

myriad of biologically-related shareholders or companies with

EMI (Enterprise Management Incentive) schemes.

Financial technology firms are offering simpler, more

transparent and cheaper ways to solve long existing problems

including the trading of shares. The bigger exchanges are also

waking up to the fact that many companies would prefer to

stay private if they could, and in the US the NASDAQ Private

Market was launched earlier this year. With so many new

alternative ways to finance companies now on offer it is not

surprising that hubs for unquoted secondary markets are coming 

into 

their own.