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Opinion

The more the merrier for unregistered share trading platforms

Investment house issuance on private electronic markets relieves them of regulatory burdens and speeds up funding. But poor liquidity remains a problem.

Private equity houses and hedge funds are showing as much creativity in their search for capital as they are in their search for investment returns.

Some have issued bonds and others have listed funds or their management companies on public stock markets. A growing number, though, are exploring unregistered share issues on alternative private electronic markets.

These private markets give issuers several advantages. By restricting access to sophisticated institutional investors, issuers can avoid the burden of transparency that a public issue entails. It also enables them to raise capital far more quickly than they could with a public issue. By selling shares to a select group of private investors, an issuer can also help set a floor price for any future public share issue.

Oaktree Capital and Goldman Sachs started the trend earlier this year when the hedge fund group raised $800 million on Goldman’s GSTrUE platform. Apollo plans to follow suit.

The system is far from perfect, however. Oaktree is stuck with Goldman as the sole market maker for its shares, and the restricted nature of the share distribution pretty much guarantees poor liquidity. Oaktree’s unregistered shares are trading about 8% below their offer price. To try to avoid this situation, Apollo has opted to list its shares on a similar platform developed by JPMorgan as well as on GSTrUE. The fact that Goldman was unable to attract even one additional issuer to its platform without issuers wanting to change the formula suggests that these drawbacks are significant.

Nasdaq announced several months ago that it was looking to create a trading platform for such private issues and this July, news broke that a group of investment banks, including Merrill Lynch, Lehman Brothers, Morgan Stanley and Citi, were working together to launch a platform by September.

For firms looking to raise money via unregistered share issues on such private markets, the more market makers and the more investors below the SEC’s 500 threshold the better.

This means that Goldman’s GSTrUE and JPMorgan’s market, although pioneers, are unlikely be the way of the future.

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