As issuers increasingly raise capital outside public exchanges to avoid stringent U.S. disclosure requirements, Wall Street is inventing new electronic trading platforms to make these private equity and debt offerings more accessible and acceptable to institutions.
Goldman Sachs already launched a platform for trading unregistered securities in May. Its first client was an alternative asset manager, Oaktree Capital Management, which raised $880 million through the sale of 15 percent of the firm. Investors in Oaktree can buy and sell shares over the new Goldman Sachs Tradable Unregistered equity system, or GSTrUE, which can be accessed via REDIPlus, Goldman's execution management system, as well as the Bloomberg Professional service.
And other brokers, including Morgan Stanley, are said to be working on similar systems. In addition, as the demand rises from issuers and investors for more transparency and liquidity in unregistered securities, The Nasdaq Stock Market is developing the Portal, an electronic platform for the resale of private equity, debt and derivatives that could appeal to buy-side traders.
"This is the first time that they're going to have a transparent marketplace for 144A securities," says Nasdaq EVP John Jacobs, who is spearheading the Portal project. While Nasdaq already operates the Portal Market to facilitate the listing of unregistered securities eligible for resale under SEC Rule 144A, what's new is the creation of a secondary trading platform, he explains.
Known as private placements, 144As are securities that the SEC has exempted from registration as long as they are sold to qualified institutional buyers (QIBs) or a qualified buyer broker, according to Jacobs. To be considered a QIB under 144A, institutions must have at least $100 million in assets to meet the requirements, and brokers must have $10 million in assets. Companies can stay private under 144A as long as they have no more than 500 investors.
Nasdaq's Web-based, password-protected system will be accessible only by qualified institutions, according to Jacobs. "Though in the beginning the buy side is going to be limited to messaging between the buy- and sell-side [participants], eventually there could be sponsored access and direct access to transactions," he says, noting that Portal will offer trading, trade reporting, historical prices, last sales and tickers. "It has everything in it but auto execution," claims Jacobs. Nasdaq hopes to launch the Portal system this summer.
Historically, private placements have been traded manually, in the dark. Today, these unregistered securities trade by appointment, Jacobs relates.
Realizing the Potential
As a result, "This market has not realized its potential," Jacobs says. "It's great for capital formation but not secondary market formation."
Institutions will feel more comfortable trading unregistered securities on an established trading platform, Jacobs asserts. "If they have a 144A security, you can see all the firms doing business here, or [they] can sell part of their holding or reinvest that," says Jacobs. "Second, if they own securities, they can pull up independent pricing -- they can see the last six trades."
However, this is not a totally new phenomenon, points out Joe Gawronksi, president and COO of Rosenblatt Securities. "To an extent, the market already exists," he says. "But there is no way to access it easily through the use of a technology platform with any degree of transparency." Gawronksi notes that Nasdaq tried to launch the Portal system in the '90s but there was not enough interest.
But times have changed. "Last year, $162 billion of capital was raised through private placements as compared with $154 billion via IPOs that are registered with the SEC and publicly traded," according to Nasdaq's Jacobs. "For the first time, more money was raised in the private placement market than on the AMEX, NYSE and Nasdaq combined."
Rosenblatt's Gawronksi adds that technology has changed, too. Now Nasdaq is trying to create a place where interest can be advertised and then executed deals are reported, he relates. "There'll be a screen where investors can buy and sell, while today it can only happen through verbal negotiations on a block trading desk," Gawronksi says.
Historically, 95 percent of the 144A market has been in debt and 5 percent has been in equity. According to Nasdaq, however, the equity portion has tripled to 15 percent of the total deal flow.Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio