With the overall trend of tech companies staying private for longer, private share marketplaces are moving further into institutional trading, and even, according to Marc Andreessen* “the third configuration – beyond the false binary of simply private or public – is here.”

This is the second part in a two-part series on secondary sales and private share marketplaces, with the first part focusing on how the technopreneur can create personal liquidity through the secondary sale of shares.

The US is still the leader at the intersection of tech investment and capital markets, as we have seen most recently with the Spac trend which started in 2020 and is only intensifying. Such as also the case with private share marketplaces.

The merger of Forge (founded as Equidate in 2014), and SharesPost (founded in 2009) in November 2020 with a combined transaction value of $7.74B, brought together SharesPost’s focus on individual investors, with Forge’s focus on institutional investors. “By coming together, we are able to optimally address the needs of the entire market”, according to the Forge CEO.

Historically these marketplaces emerged to cater for individuals and small investor trades, such as with SharesPost, EquityZen, MicroVentures and AngelList, serving the needs for liquidity through the sale of secondary shares and a healthy appetite for acquiring these shares by non-institutional investors. This need has only increased of late with the trend of companies staying private for longer and becoming more valuable but without an IPO or other liquidity event.

An interesting evolution is marketplaces such as EquityZen setting up managed funds to buy up secondary shares as a principal, and then marketing the funds to mostly individuals. The marketplace is in a good position to buy the most attractive shares and also to sell its funds’ shares when liquidity is required. It also means that the marketplace, as a principal, can more easily manage the buyer and seller issues particular to private shares.

The private share market has become too valuable for the traditional financial institutions to stay away. Based on Pitchbook data, in 2020 the combined value of venture-backed private companies exceeded $2 trillion, having grown at more than 40% compound annual growth rate over the prior decade. Hedge funds and traditional private equity funds that are looking for exposure to later stage companies are turning to secondary sales to acquire positions in companies that they hope will IPO at some stage. At the same time, a fund may need to rebalance its portfolio and thus liquidate its investment through a secondary sale.

JP Morgan earlier this year made a strategic investment in Zanbato, an SEC-registered Alternative Trading System that is today the leading inter-broker platform for trading venture-backed private shares. More than 100 banks and brokers use its ZX Platform for price discovery, liquidity, and trade execution services across private markets globally.

The Nasqaq itself entered the private share business through the acquisition of  SecondMarket in 2015. Nasdaq Private Market is a SaaS company that provides transaction software to private companies and investment funds looking to do tender offers or share buybacks. The company also has a trading business arm for buying and selling illiquid assets such as share auctions and private company shares. In the early days of the company a major source of business came from its platform for trading shares of Facebook and other in-demand startups.

However, the most interesting development may be with Carta X, the 9 year old maker of cap table management software, Carta, that wants its marketplace to compete with the Nasdaq exchange, providing a listing venue where companies could potentially stay private indefinitely – “a stock market for private companies”.  Goldman Sachs is quoted as a customer. This provides a mechanism for private companies to issue new shares in an auction model that can potentially result in higher prices for sellers.

Carta are eating their own cooking by listing on their Carta X marketplace and auctioning their own shares. The Financial Times reported in February that investors purchased almost $100m in shares following the company’s first auctions on the exchange, in trades that valued the company at $6.9bn — more than double the valuation it received from venture capitalists less than one year ago. Andreessen Horowitz invested in Carta’s Series E and Marc Andreessen is a board member. A key question is whether other companies will be interested in this auction model which has disclosure requirements such as 2 years financial statements.

The future of private share marketplaces is driven by an excess of private capital looking for a home, and by companies staying private for longer and becoming more valuable. They are undoubtably here to stay but it will be interesting to see whether Andreessen’s “third configuration” does become a thing.

* As reported in the Financial Times on 28 February 2021.