Placing unlisted shares of private companies onto liquidity platforms is gaining in attraction. The notion of a private listing may seem an oxymoron, but having the liquidity and currency of a listing with all the benefits of remaining private would seem to be corporate finance nirvana.
Large, unlisted technology companies such as Facebook are trying to find ways of getting liquidity into these private held shares, without all the pain of going public. Recently, Alibaba Group, the parent of Hong Kong listed Alibaba.com, provided liquidity to its shareholders though the secondary markets, which allowed its employees and early investors to enjoy something of an exit. That made us curious to learn more, so we asked David Berger, head of Asia-Pacific markets at SecondMarket, a provider of secondary liquidity solutions for private companies, to explain.
What you do is offer a solution to work around the grey market, right?
Exactly. The grey market, through which individual unregulated actors were buying and selling Alibaba’s shares, sometimes spamming employees with e-mail offers to buy or sell, was an unwanted distraction at a company that prefers a focus on its core competency — building great online platforms.
These unregulated and uncontrolled grey markets for securities, like those that naturally develop in the shares of hot private companies such as Alibaba, are dangerous and disadvantageous for all stakeholders. This is precisely why SecondMarket, which is regulated closely by the SEC and Finra [Financial Industry Regulatory Authority], has been organising these markets and handing the keys of control to company executives.
In the grey market, confidential company information is often leaked and less sophisticated shareholders are taken advantage of by those with an information imbalance, more savvy or just less scruples. Employees often take time away from their job functions to check recent prices and count their paper wealth. And companies are often forced to exercise their right of first refusal to stop their shares from falling into the wrong hands.
What does Alibaba’s move to systematise trading in its unlisted shares mean for other private companies in China?
Jack Ma, the founder and CEO of Alibaba, has blazed a path for his peer entrepreneurs in China by striking a careful balance between his company’s interest in staying private and the liquidity needs of his shareholders.
He developed a tightly controlled and orderly marketplace supported by great hand-selected and long-term investors like DST and Temasek.
I expect you will see more and more company-controlled shareholder liquidity programmes as the public markets become less hospitable and entrepreneurs continue to see the value of remaining private. Alibaba’s announcement of a shareholder liquidity event is an important milestone for Chinese entrepreneurs and private company shareholders alike.
What is Alibaba Group’s aversion to a public listing?
Jack Ma, who has built some of the largest marketplaces in the world, built a marketplace for the shares in his company. He didn’t need the public markets to raise capital and has stated that he would prefer to build a strong company that will create value for a long time before going public.
Through his experience with Hong Kong-listed Alibaba.com, he recognises that successfully navigating the public markets — which are dominated by high-speed traders who lack interest in the underlying assets and are marked by volatility not reflective of their listed entities’ performance — can take as much luck as successfully navigating a night at the Lisboa in Macau.
Will other Chinese entrepreneurs follow Alibaba’s lead?
As entrepreneurs in China recognise the benefits of staying private longer — choosing, like Ma, to focus on growing their businesses into going, thriving concerns, instead of the incessant filings and quarterly numbers required by the public market casinos — the demand for shareholder liquidity will naturally increase. Entrepreneurs will come to recognise that creating controlled liquidity events is not only beneficial for their shareholders, but critical to their companies’ continued success.