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 / Summer 2011 / Issue 63(originally published by Booz & Company)


The New Financial Matchmakers

The rise of private market networks is changing the capital markets and opening up new opportunities for business leaders and innovators.

In that ancient, un-networked world where public stock markets evolved, those markets were the only way that nascent companies could reach huge numbers of potential investors and that investors could trade with one another. Investment bankers and their well-established interrelationships provided the only practical path for finding merger or buyout candidates. And the key technologies for marketing your new hedge fund or selling your limited partnership interests were the (landline) telephone and your broker’s Rolodex.

Surprisingly, perhaps, that world has survived largely intact to this very day, but it’s all about to change. Now, private market networks (PMNs), such as SecondMarket, AxialMarket, and Angelsoft, are starting to do for the capital markets what eHarmony did for dating.

The idea of using the Internet to match buyers and sellers of financial products is not new, of course; it’s been talked about since eBay got started in the mid-1990s by creating a liquid market for broken laser pointers and Pez candy dispensers. Innumerable online bulletin board services for investors have been launched, with limited success. But a new generation of private securities platforms that has begun to emerge over the past few years provides much more: opportunity discovery and recommendation engines; analytics and evaluation tools; secure virtual diligence rooms with tiered access rights; industry benchmarks and comparables; standardized documentation and fee terms; deal, and deal flow, management systems for both the buy and sell sides; and lists of experienced service providers to consummate transactions. These platforms also offer a reach equal to that of the Internet itself, something not even public exchanges can offer.

One might think these developments are simply a natural consequence of the adaptation of the investment world to a networked, online environment. But that would understate both the reality and the ramifications of PMNs. The fact is that these new networks are enabling, and are enabled by, some fundamental changes in the life cycles of businesses and investments.

Let’s look at early-stage venture capital as one example. In our time of hyper-rapid change, corporate organisms are becoming more like fruit flies than elephants: Intense evolutionary pressures favor more, shorter generations of faster, lighter companies. Indeed, as David S. Rose, the founder of Angelsoft, points out, the capital necessary to launch new companies is falling by more than an order of magnitude per decade; at the same time, accelerating societal and technological changes limit the expected life span of new companies. That means many startups are too small to interest most venture capital firms, and at their zenith they may still be subscale for either an initial public offering or a traditional investment bank M&A process. The few startups that reach truly large scale often neither require the massive capital that IPOs offer nor wish to forsake the luxury of private life for the glare of the public company spotlight. As a result, even the most successful new companies frequently seek to satisfy their (relatively modest) liquidity requirements through private transactions.

Enter PMNs. Against this backdrop, they help entrepreneurs and angel investors find one another without the intervention of venture capital firms; provide liquidity for employees and early investors in pre-public companies (such as Facebook, Twitter, and Zynga, to name just a few); and allow business owners to find growth capital, strategic buyers, and merger partners.

The impact of PMNs outside the world of operating businesses is no less dramatic: They help match investors with hedge funds and private equity funds, and create secondary markets for both; offer liquidity for out-of-favor financial instruments such as failed auction rate securities and collateralized mortgage obligations; and even raise the prospect of active markets in traditionally illiquid assets such as art and wine.

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