Private Market Networks Disrupt US Capital Markets


Until recently, companies scouting M&A transactions or looking to raise money sought out familiar intermediaries like Banks, Investment Banks and Alternative Lenders. Today, thanks to the power of the Internet and the emergence of some innovative platforms, CEOs now have another option to address their US financial needs: Private Market Networks (PMNs). 

PMNs like SecondMarket, Angelsoft and AxialMarket are new, web-based financial matchmakers that quickly and seamlessly bring together corporate buyers and sellers as well as financial lenders and borrowers. Though in their infancy, PMNs are beginning to do for Capital Markets what firms like eBay did for classified ads:  leverage the unparalleled reach and power of the Internet to revolutionize an established business.

Like online auctions, PMNs have a compelling value proposition in today’s economy.  Just as eBay allows buyers and sellers to find each other, negotiate the terms, and agree to transact business, so do PMNs enable firms and investors to locate each other and then efficiently narrow down the field of potential business partners through due diligence.

Using the internet to connect buyers and sellers is not a novel idea.  Over the past decade, a number of start-ups attempted to serve as financial intermediaries, albeit with limited success. Thanks to new Web 2.0 technologies, security protocols and integration standards, PMN clients can benefit now from a powerful suite of services, including: opportunity identification and recommendation engines; analytics and evaluation tools; secure virtual diligence rooms; industry comparables and; standardized documentation and fee terms – not to mention deal flow. Significantly, PMNs’ inherent network effects – more sellers attract more buyers and vice versa – have the potential to generate substantial market liquidity in a short time. 

These new business models are beginning to play an important role in a variety of areas.  For example, PMNs are emerging as an important exchange for early stage firms looking for their first couple rounds of venture capital. According to Booz & Co., a consultancy, Angelsoft is attracting over 4,000 global start-ups each month seeking financing. In other cases, PMNs can provide liquidity for employees and early investors in pre-public companies (as was true with Facebook before its Goldman Sachs deal, and remains true for other sexy pre-public companies like Twitter and Zynga). 

Moreover, PMNs could be play a significant role in the arcane and illiquid world of alternative assets.  Not only could PMNs help match investors with hedge funds and private equity funds, but they also could help create secondary markets for each of them.   Moreover, PMNs could provide liquidity for out-of-fashion financial instruments like failed auction rate securities and collateralized mortgage obligations.  Finally, PMNs could provide an active market for traditionally illiquid assets such as art, memorabilia and wine.

Although still small by Wall Street standards, PMNs are growing quickly. According to Booze, SecondMarket closed some $3B of transactions in illiquid securities in 2010, including several hundred million dollars in equities of late-stage venture-backed companies. Moreover, AxialMarket had companies with combined revenues of approximately US$30B listed for sale in 2010 . 

Perhaps the biggest industry impact will be on client fees. Through its model, PMNs can deliver transparency around which fees are paid for what services.  In many cases, this can trigger fee compression. For example, as a rich source of information PMNs can provide for at a low or zero cost basic knowledge of how the sales and financing processes work as well as access to a critical mass of buyers and sellers. As these platforms proliferate, many traditional investment bankers will be forced to reduce fees on commodity services and then compete more aggressively on the higher margin deal structuring and terms.

The history of the Internet tells us that PMNs could flourish and capture significant transactional market share.  Of course, much will depend on regulatory considerations (which are presently unclear), the staying-power of traditional financial intermediaries, and client adoption rates.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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1 comment so far

  1. Executive Recruitment on

    Can’t wait to read more from your blog.


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