Goldman Sachs, which owes much of its wealth and influence to its mastery of trading on public markets, is turning that franchise on its head by creating its own private system to trade the stocks of companies that don’t want the scrutiny and regulatory burdens of going public, notes the Wall Street Journal. And with others contemplating similar moves to set up private trading systems, there is much for market watchers to debate about where it’s all leading.
The new system, GS TRuE — a fashionably jumbled upper- and lower-case acronym for Goldman Sachs Tradable Unregistered Equity — made its debut on Monday with an $880m sale of a 15 per cent stake in Oaktree Capital Management, an alternative-investment manager.
GS TRuE is the first of several new, private exchanges being considered by Wall Street firms and others, says the Journal. Nasdaq is also planning its own new market for smaller, unregistered securities.
These markets will generally be closed to individual investors. Goldman’s market, for example, is open only to large institutional investors with assets of more than $100m. That is because the stocks traded on GS TRuE aren’t registered with the SEC and issuers aren’t subject to SEC regulations designed to protect individual investors.
In the Journal’s view, it “represents the latest step in the creeping exclusion of individual investors from a growing proportion of financial-market activity.”
Roger Ehrenberg at Information Arbitrage goes a step further and says “any regulatory regime that pushes blue-chip potential issuers such as Oaktree Capital Management to avoid going public has fundamental problems.”
Ehrenberg cites a recent FT report on private placements that he says “only bolsters my arguments with these fascinating and damning statistics”:
Straight public equity offerings on the three largest US stock exchanges – the New York Stock Exchange, Nasdaq and the American Stock Exchange – raised $154bn last year, while offerings involving so-called 144A private placements raised $162bn.It marks the first time deals involving private capital raisings have raised more than basic public offerings. In 2005, when IPOs on the three largest exchanges raised $147bn, deals with private placements raised just $101bn.
The story goes on to drive home one of Ehrenberg’s big themes: the dampening effect that Sarbanes-Oxley is having on the perceived attractiveness of the US public equity markets.
As he himself points out, Ehrenberg is not alone in his concerns about the “potentially tectonic effect” that GSTrUE and other private pools of liqudity could have on US exchanges; the Nasdaq’s scheme to launch an automated market to handle the trading in these new private offerings would add huge momentum to Goldman’s move.
This, he says, is “absoutely critical when assessing the magnitude of the threat posed by these alternative exchanges”. “The retail investor is not the driving force in the equity markets here or abroad, and given the structure of US regulatory doctrine, once one crosses into the realm of the “accredited investor” there is much one can do on a private basis. Like start a private exchange. Or many private exchanges. If GSTrUE is successful, as I expect it will be, is there any doubt that Morgan Stanley and the like are close behind?”
Indeed, says BreakingViews, Goldman’s debut issue via its new GSTrUE trading platform “looks like a coup”. But other firms will be loath to list their clients on a competitors’ exchange, it notes. “So they are racing to build their own. And it will be better for clients if the banks team up.”
“Many bosses would love to have a traded stock without the regulatory headaches of a public listing. Private equity and hedge funds in particular are looking to raise permanent capital without ceding control or risking trading strategies. Privately placed stock, traded on an exchange, could do the trick”, says BreakingViews.
Unfortunately, unlike public shares, “private stock usually can’t be used as an acquisition currency or to recruit and retain employees. That is in part because any company with 500 or more shareholders automatically becomes public in the eyes of US regulators.”
“That rule could force banks to collaborate. A company listing on one of these platforms will live in fear that its investors will sell shares to too many buyers, pushing it over the threshold. Listing on only one exchange would limit this risk by making it easier to track ownership. So each platform could end up with only its sponsoring banks’ clientele — splintering the market.”
Something similar happened as dozens of “black pools” launched in recent years, adds BreakingViews. “These trading networks set up by banks and exchanges let large investors secretly swap big blocks of shares. But it is hard to find out which of the 40-plus pools offers the best price for a given trade. To solve this, some have begun to collaborate, directing trades to the pool with the best price. If private stock platforms are to fulfill their potential, they will likewise have to find ways to work together.”