Broker-dealer Gate Technologies is muscling in on the rapidly expanding world of secondary markets with a platform it says will serve as a one-stop shop for investors in illiquid securities and alternative assets such as private equity, restricted stock and warrants.
The firm, which was formed in January 2009, aims to bring transparency to asset classes that traditionally have been traded over the counter with an electronic marketplace that provides neutral research while opening the door to fresh sources of liquidity.
The business model has garnered widespread attention in recent months as investors have tapped into similar firms like SecondMarket and Sharespost in order to buy equity in privately held social media giants Facebook and Twitter. Yet even as Gate opens the door to centralized private equity trading, the firm is also honing in on more esoteric trading techniques, such as customized transactions for tax credits.
Gate chief executive Vince Molinari is wagering that by flooding investors with a wave of information about historically opaque instruments - along with a centralized location where they can be traded - the firm can create a new marketplace and attract institutional investors. The venture will also pave the way to better price discovery by marking alternative assets to market, while giving buyers and sellers a place to make deals without a middleman, Molinari explains.
"We wanted to make this system the most transparent and the most bountiful in terms of information because the more information our participants have, the more likely they are to confidently transact," Molinari says. In a move in February 2011 aimed at shoring up its fledgling business model, the New York-based firm bought InfoExchange, a company that analyzes investors' buying patterns and then uses that information to predict what type of data will be most useful to them. Molinari likens it to how Netflix suggests movies to viewers based on prior film choices.
"You own these three warrants, so you might like to see this one. Or you've consumed this much information about this particular sector - here are offerings that are in that sector," Molinari relates. "So the more you use the platform, the more knowledge it gains from you. It's monitoring what your portfolio holdings are and what your watch lists are."
Filling the Void of Fresh Capital
Meanwhile with the U.S. initial public offering market continuing to sag, firms such as Gate Technologies also can help privately held companies find fresh capital, Molinari contends.
"There is no IPO market for the sub- $50 million, even $100 million offerings," Molinari says. "So we have a lack of capital that's being redeployed to the private sector because of market conditions, partly because of Sarbanes-Oxley, and not having the middle market investment banking organizations we once had."
This particular aspect of the business caught the eye of long-time venture capitalist John Pappajohn earlier this year. In April he invested $3.5 million in the firm, citing the changing IPO landscape in the process.
But even as platforms like Gate continue to garner growing interest from consumers of alternative investments, regulatory hurdles remain. Registered investment advisers, who are backed by well-entrenched lobbyists in Washington, are in no hurry to allow their business to be usurped by upstart trading platforms, argues George Michaels, the founder of G2 Systems, a provider of compliance solutions to the alternative investment community.
Currently, "If you're going to alternatives, you have to go through a financial consultant," Michaels explains. "They're saying to Washington, you can't possibly let this go electronic because we're the only thing stopping the Bernie Madoffs from looting the money of the world. In fact, that's not true. The reason they're lobbying really heavily is they earn so much in fees."
But Gate's Molinari says his company has been actively working with regulators to shape the fast-growing market. "There are rules and regulations that exist as they were written in 1964 that are not consistent with where the marketplaces are today," Molinari notes.
Meanwhile, Tom Taulli, author of "All About Commodities," argues that privately owned companies that investors want a piece of - particularly Twitter and Facebook - are trying to find ways to limit the number of shares that can find their way onto secondary markets.
"That's a big problem for a lot of these secondary markets - that a company will clamp down on this and prevent supply," Taulli says. "There's a lot of demand, but will supply start to drop?" As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced Trading in 2010, Grant's news analysis has touched on everything from the latest ... View Full Bio