The London Stock Exchange says it wants a role in the funding of private companies as part of the UK’s wholesale markets review. No wonder. This is a growth market, accounting for about 7 per cent of global investable equity assets, up from 2 per cent two decades ago.
More businesses are staying private for longer: the median period between foundation and flotation was 11 years in the US in 2021 versus six in 2000. Start-ups are flourishing across the globe. The stampede of $1bn-plus companies, now numbering more than 900, means they are more valuable too.
Boutique businesses already operate secondary markets in private stocks. Employees or angel investors can list their shares with the price sought. This allows stockholders to cash out — to buy a house for example — before there is a float, or because they fear there will never be one. Venture capital funds, irked at missing out on funding rounds, can top up holdings.
Some boutiques, such as Singapore’s Torres Capital and EquityZen of the US, preside over sizeable private stock exchanges. Forge, which counts tech wunderkind Peter Thiel among its original investors, claims $10bn of transactions in the shares of over 450-plus companies
Last year, Nasdaq spun out its own private markets trading operation. This transacted 57 private company-sponsored secondary transactions worth $4.6bn in the first half of 2021. As big exchanges get in on the act, investors should benefit from deeper liquidity and lower fees.
For bourses, the extra business comes with strings. Private companies disclose little limited information, which is invariably tilted towards the vendor. Insider trading and fraudulent activity are big risks. The admission of external capital may change the character of the company. If employees can cash out more easily, their work ethic may weaken.
These perils do not add up to a case against the London Stock Exchange experimenting in markets in private shares. Markets of any kind are places for experiments as well as safe bets. The LSE’s challenge is to devise a structure that is democratic while limiting scope for rip-offs.