With technology stars such as Facebook, Zynga and Groupon holding off on IPOs, it’s meant even more business for private stock markets like SecondMarket. The trading service, which connects private shareholders with buyers, said transactions in the fourth quarter hit $157.8 million, more the doubling the $75 million recorded from the third quarter.
The total dollar amount of transactions comes from a jump in participants, both sellers and buyers, and an increase in valuations. SecondMarket doesn’t talk about pricing but the number of participants has almost doubled in the third quarter from a little over 15,000 to 35,000 at the end of the fourth quarter.
Valuations have also spiked recently. For example, a private auction of Facebook shares on SecondMarket this month reportedly produced a $70 billion valuation, with share prices hitting $28.26 per share, up from $22.75 a share from a previous auction last month. Private shares of LinkedIn have been selling for $30 a piece on SharesPost, another secondary exchange, giving the company a valuation of $2.9 billion. According to Nyppex LLC, a secondary private equity advisor, Facebook, Groupon, Twitter and other start-ups have seen their total value rise 54 percent from June to December based on sales in secondary markets. That helps explain some of the interest in the market: share prices are growing faster than the traditional VC returns and the S&P 500. The exploding valuations have, as my colleague Mathew pointed out, a whiff of a bubble though its confined largely to secondary and private markets for now.
Since its founding in April 2009, SecondMarket has overseen more than a half billion dollars in private transactions. The strong growth in SecondMarket and SharesPost underscore the interest in private stock, especially for companies who aren’t particularly eager to go public. It also highlights why the government is taking a look at these markets,
which are unregulated. The Securities and Exchange Commission is reportedly seeking information on private transactions of Facebook, Twitter, Zynga and LinkedIn shares.
SecondMarket said in the fourth quarter, Facebook accounted for 39 percent of transactions. Meanwhile, LinkedIn represented 7 percent of transactions, followed by Etsy (5 percent), Chegg and Epocrates at 2.5 percent. The shares have traditionally been sold by ex-employees and investors with ex-employees historically making up the largest block. But SecondMarket said current employees became the largest group of sellers in December. Among buyers, venture capital funds made up more than 40 percent of completed trades but hedge funds, asset managers and secondary direct funds have emerged as other important buyers for private shares.
Facebook’s $450 million investment from Goldman Sachs and the $200 million pulled in by Twitter from investors such as Kleiner Perkins illustrate the changing dynamics for hot start-ups. With no shortage of late-stage funding, it allows hot companies to remain private for longer. “The cachet of going public has clearly diminished from what it was 10 years ago, and instead of rushing to file they are delaying,” said Seth Levine, managing director of the Foundry Group, on a conference call Thursday held to explain 2010 and fourth quarter venture capital data from the NVCA.
While that may be good for founders, who want to maintain some control and avoid the scrutiny that comes with an IPO, it doesn’t always help out employees and investors looking to cash out. That’s where SecondMarket is finding success, tapping that desire by private shareholders to sell and mating it with investors looking to get a piece of the hot new start-up.
However, trading isn’t limited to finding an exit in companies avoiding an IPO. The sales of LinkedIn shares show that buyers are also anxious to get in on start-ups that seem headed toward their own public offerings. Interest is also high in Groupon, which recently spurned Google’s advances and now appears headed toward its own IPO. Even with the added government scrutiny and competition from electronic trading platform Xpert Financial, this private market will likely continue to thrive as investors look for ways to jump into the fray.
Take a look below at the companies getting the most attention in SecondMarket:
Related content from GigaOM Pro (sub req’d):