Tuesday, June 29, 2021
Asset Match Private Market
Private Market is our secondary market for buying and selling shares in private companies. It is our core product and the first market type that we created.
Secondary liquidity is an important (and yet often overlooked) aspect of private capital markets. A lot of attention is given to how new capital is provided to startups and private growth companies, but the method and timing of exit are often given superficial consideration in pitch decks with the copy-and-paste statement of “three to five years trade sale or IPO.” We have all seen it – and it rarely happens.
Smart companies realise that they can do better than this and look to provide mechanisms for shareholders to have access to exits (or partial exits) before the entire company is sold or goes public. We have written about the company lifecycle and the need for liquidity previously.
How does the Private Market work?
All companies are unique and face individual challenges. How these challenges are defined and addressed will determine the best liquidity solution for the company at that time.
When we are advising on the best market type, we take the time to understand the main concerns of the board and the shareholders, what the corporate structure is, what the overall growth and exit strategy are etc. This process will determine whether that company requires admission to the Standard or Bespoke segments of Private Market.
Both markets operate on our model of periodic auction-based liquidity, the main features of which are:
1. Defined auction calendars;
2. Visible real-time order books; and
3. Single final auction price and allocations determined by non-discretionary auction algorithms.
(“Non-discretionary” is a fancy way of saying that the algorithms find a result in all circumstances and do not require any manual override.)
The benefits of auction-based liquidity have also been covered previously.
So, what are the differences between the Standard and Bespoke segment? In brief, the Standard segment settles in CREST – everything else is Bespoke. There is more to it though…
Private Market – Standard
The Standard segment, as the name implies, is our standard market model that is a fixed template for companies to use. It is particularly suitable for companies with lots of shareholders that are pre-IPO or that have come off the public markets such as the LSE’s Main Market and AIM.
The key features are:
1. Shares must be freely transferable
This means no pre-emption rights on transfers, no ownership caps, no ownership thresholds that require board approval etc.
2. Shares must be CREST eligible
CREST is the standard electronic settlement system for shares in the UK. Companies must adopt the CREST rules – either by updating Articles of Association or by Board resolution – and appoint a CREST registrar. Both of these steps are straightforward.
3. Orders are placed via stockbrokers
As with public company shares, individual shareholders cannot hold shares in CREST and so must hold them via stockbrokers. This is an important step in ensuring quick settlement (t+1 rather than six weeks for paper settlement) and mitigating “execution risk” (which is the risk that a trade fails because a party either does not have the funds available to buy or the shares available to sell). We have relationships with over 60 regulated stockbrokers in the UK who can participate in our markets.
The Standard segment takes existing tried-and-tested infrastructure and adapts it for private markets.
Private Market – Bespoke
For some companies, the Standard segment does not satisfy the particular preferences that they have. There may be restrictions on share transferability; there may be restrictions on who can participate; the instrument to be traded may be non-standard and have unique characteristics etc. Whatever the reason, the Bespoke segment provides a more flexible and customisable liquidity solution – all still built around our model of periodic auction-based liquidity for price discovery.
Whilst there is no set template, the key features available to Bespoke segment companies are:
Many companies that are admitted to trading on the Bespoke segment operate restricted or internal markets where participation is limited to existing shareholders and invited investors. Companies can control who can see the auction, who can participate and to what extent.
2. Corporate governance
When access to auctions is limited, and where directors and large shareholders may participate, the Board may perceive and want to manage conflicts of interest. If a company chooses to run a market themselves then, aside from regulatory implications, they may inadvertently expose themselves to accusations of bias and questions about impartiality. With its transparency, the Bespoke segment allows companies to mitigate these corporate governance concerns and remain at arm’s length.
3. Settlement solutions
Companies may choose to self-settle auctions (depending on how they are set up and the instrument being traded) or opt to outsource this and mitigate execution risk. We work with partners that can look after a company’s share register, handle client funds in escrow and settle trades – in effect taking on the same role as the CREST registrar and stockbroker in the Standard segment.
The Bespoke segment addresses complexities and typically takes longer to implement than the Standard segment, but each company ends up with a liquidity solution that is unique to it.
We currently have Bespoke solutions for international clients that run internal markets for employees; a co-operative that has preference share member’s units; debentures with season ticket rights for a Premier League football club; and many more.
Not sure which market is right for your company?
That is what we are here for! We speak with CEOs, Finance Directors and Company Secretaries every day about the secondary market type that best suits their business.
Contact us to start a conversation about your company’s needs. All discussions are kept confidential, and we can be brought “inside” when speaking with companies that are publicly quoted.