Private exchanges are looking to lure money managers

Executives at illiquid-asset exchange SecondMarket Inc. want traditional money managers to use their company

Executives at illiquid-asset exchange SecondMarket Inc. want traditional money managers to use their company.

“Asset managers are at the top of our target list,” said Jeremy A. Smith, chief strategy officer and head of the private-partnerships market at SecondMarket.

One firm on its customer list is Pacific Investment Management Co. LLC, the bond giant’s chief executive, Mohamed El-Erian, confirmed in March.

Pimco launched a program July 1 to allow employees to trade private shares on SecondMarket, spokesman Mark Porterfield wrote in an e-mail.

“We have created an internal equity program as part of our efforts to provide long-term incentive compensation for our highest-performing employees,” he wrote. “The program that we have created further aligns compensation with the long-term performance of our firm, which is a direct reflection of the value we deliver to our clients.”

VC FUNDS

Financial services firms represented less than 15% of the companies whose shares were being sold on SecondMarket and less than 5% of the shares purchased, according to the company’s quarterly report for the period ended Dec. 31.

Venture capital funds were the most active buyers, making up more than 40% of complete trades. Close to 20% of the buyers were high-net-worth investors.

SecondMarket is one of four firms that offer private-share trading. The others are Xpert Financial Inc., which hasn’t yet started trading; SharesPost Inc., an online bulletin board for buyers and sellers; and Nasdaq OMX’s Portal Alliance LLC, which trades only Rule 144A (private-placement) shares among qualified institutional buyers with more than $100 million in assets.

A spokesman for Xpert Financial said that officials won’t disclose registered users.

SharesPost’s 65,000 members include venture capitalists, angel investors, mutual funds, accredited individuals, family offices and company employees, chief executive David Weir wrote in an e-mail.

“When we launched in June, the market was just beginning, and each of the market participants [were] trying to figure out if it would take off and how it might impact them,” he wrote. “Now people understand this market is here to stay — that it is an inevitable reaction to the desire among a broad universe of investors who desire access to the most interesting growth company investment opportunities and the need [of] early-stage investors and employees for liquidity.”

GOLDMAN’S EXPERIENCE

The Goldman Sachs Group Inc. had its own exchange to trade 144A shares, but no traditional money managers were listed on the exchange.

Goldman Sachs’ exchange had only two listings: Oaktree Capital Management LP and, before its initial public offering, Apollo Global Management. Goldman Sachs was one of the eight founding banks of Portal Alliance, and bank officials decided about a year ago that future listings would be on Portal Alliance.

There are a “handful” of firms trading on SecondMarket, Mr. Smith said, declining to say how many or to identify the firms. He would say only that they are a mix of private-equity and traditional firms.

SecondMarket is making a big push to attract larger, established private businesses including community banks, money managers and other private companies. Those efforts have been “well-received,” Mr. Smith said.

The allure of private markets is allowing a company to create private shares to attract employees, yet remain private. These shares don’t trade constantly.

They trade during specific windows, Mr. Smith said. SecondMarket gives each company control over who can buy, who can sell, how much can be sold, when the market will open and what level of information will be revealed, he said.

Arleen Jacobius is a reporter with sister publication Pensions & Investments.