All good things must come to an end, and so it is with SecondMarket Inc.’s four-year run as the biggest private market for buyers and sellers of Facebook Inc. shares.
The initial public offering Facebook has planned for today forced an end to the private trading, which has driven the company’s valuation up more than 10-fold since 2008 to exceed $100 billion. Commissions on Facebook trading may have accounted for almost a third of SecondMarket’s revenue last year.
The challenge to replace those sales has forced SecondMarket Chief Executive Officer Barry Silbert, 36, to turn to even more exotic investment opportunities to retain his 100,000 wealthy individuals and institutions: wine, fine art, diamonds, intellectual property and other so-called alternative assets.
“They were probably always going to go down this route, and now it’s just a little more a question of survival than a question of growth,” said Adam Sussman, partner and director of research at Tabb Group in New York.
SecondMarket, based in New York, plans to raise money from its clients for at least eight different investment funds, run by outside managers, Chief Strategy Officer Jeremy Smith said. It has already raised almost $3.5 million for a venture capital fund that specializes in educational-technology companies. It’s also trying to raise money for a planned $200 million fund for investing in wine and a $500 million one for distressed residential loans. SecondMarket’s revenue would likely come from commissions or management fees, Smith said.
“These are next-generation alternatives,” Smith, 36, said in an April 13 interview. “We’ve got all these people together, and most of them came because they wanted to invest in private companies.”
SecondMarket’s biggest business segment now is trading fixed income securities, ranging from bankruptcy claims to asset-backed bonds and auction rate preferred securities, said Bill Siegel, SecondMarket’s senior vice president of new ventures.
SecondMarket and Facebook had an almost symbiotic relationship. SecondMarket started in 2004, handling its first trade in Facebook in April 2008, when the social-networking company was worth a fraction of the $104 billion valuation that it’s seeking in its IPO. The following year, private trades valued it at $5.6 billion, according to New York-based research firm PrivCo.
The offering of 421.2 million shares at $34 to $38 each, scheduled to price today, would make Facebook more valuable than Walt Disney Co.
Meanwhile, SecondMarket grew in revenue and public recognition. Its reliance on Facebook was evident in 2011. The value of transactions in all private shares at the firm jumped 55 percent that year to $558 million, even while some of its most-traded stocks, such as LinkedIn Corp., Groupon Inc. and Zynga Inc., left for the public markets.
A SecondMarket regulatory filing in February hinted at the effect of losing Facebook. It said commissions generated by “one issuer” generated 31 percent of the company’s revenue last year. Smith said only that private-company stock trading has accounted for about a third of SecondMarket’s overall revenue, and of that, Facebook during certain periods may have accounted for more than half.
SecondMarket doesn’t disclose its commissions or management fees it collects from clients. SecondMarket spokeswoman Aishwarya Iyer declined to comment.
Facebook ‘Gravy Train’
After Facebook, the most-watched companies remaining on SecondMarket’s platform include Twitter Inc., Foursquare Labs Inc. and Dropbox Inc., according to its website. While popular, “no other company has materialized that takes the place of Facebook,” said PrivCo Chief Executive Officer Sam Hamadeh. “They realize this gravy train is fading fast.”
Trading on SecondMarket and smaller rival SharesPost Inc., based in San Bruno, California, is limited to so-called accredited investors who have at least $1 million in assets excluding their primary residence, or $200,000 in annual income, as required by U.S. Securities and Exchange Commission rules.
SecondMarket may get a boost from the Jumpstart Our Business Startups Act, signed into law on April 5. The law ends a ban on advertising private investments to non-accredited investors, easing the way for both SecondMarket and SharesPost to jump into that business, according to Smith and SharesPost founder Greg Brogger.
“The regulations have kept the business from being scalable,” said Brogger. “We are looking for a variety of ways to route investors’ capital into these companies.”
The JOBS Act may also broaden the universe of stocks available for trading on these platforms. It allows companies to amass more shareholders while staying private. Facebook was pushed to complete its IPO this year partly because it had surpassed 499 shareholders, requiring the company under U.S. regulations to begin disclosing financial information as a public company, people familiar with the matter have said.
According to Siegel, 32, SecondMarket has been “baking” its diversification strategy for a while.
“This is an extension of the philosophy of giving our investors access to unique alternative asset classes,” he said.