“…the line between public and private markets continues to blur.”
‘Dual Listing’
// When I started out as a trade assistant on the Chicago Board Options Exchange (CBOE) I worked with my manager in our firm’s DPM. As the DPM, or Designated Primary Market-Maker, we were responsible for providing fair and liquid markets. There could be five to ten stocks in a DPM and if you were lucky enough, one of the stocks (or all) was actively traded. The more you could buy on your bid and sell on your offer, the more money there was to be made. And ‘back in the day’ spreads were extremely wide to where they could trade in $1.00 increments as opposed to today where spreads are usually $.01.
As stocks in a DPM became more active, the increased order flow attracted more traders. The new traders were from competing firms that inevitably commandeered some of the trading volume. However, they were helpful, and needed, to provide orderly markets as well as liquidity. The markets could narrow a smidge as some traders were willing to buy a little higher or sell a little lower but the markets continued to be wide enough to placate everyone in the trading pit.
At the time there were four major options exchanges. The CBOE in Chicago, the AMEX in New York, the PHLX in Philadelphia, and the PSE ‘PCOAST’ in San Francisco. Initially, it was an unspoken rule that if a stock listed options on one exchange, it was off-limits to the others. Eventually, one exchange went against the crowd and decided to start listing option markets on stocks that were already ‘claimed’ by another exchange. I remember when one of our big stocks was listed on the PCoast and my manager was livid because he knew the markets were about to get a lot tighter, and instead of making two fistfuls of cash, he would be making just one.
But in a competitive market, this only made sense. When a business (or trader) discovers huge margins, they’re going to get attacked. And not only that, the DPM needs to be giving the customers, retail investors or institutions, the best price. When more exchanges were involved in making markets, it provided more liquidity and it improved pricing.
// This past week in the secondary markets the big news was Forge acquiring SharesPost for $160 million in cash and stock.
Now with one less exchange, the number of major platforms that facilitate the buying and selling of pre-IPO shares sits at four, not unlike the options exchanges mentioned above. There are Forge and Carta on the west coast and the Nasdaq Private Market and EquityZen on the east coast.
With the recent crisis, I was curious as to what that meant for these platforms whose supply is dependent on early-stage companies. With fewer companies comes less trading volume. So it didn’t surprise me that SharesPost was swallowed up as it seemed it was falling behind its peers.
However, as much as these platforms want to be the ‘one platform to rule them all’ or want to create ‘the stock market for the private markets,’ they need to remain independent. In order for there to be ‘transparency,’ which the secondary markets absolutely need to succeed, there can’t be one institution establishing the price discovery. All of these platforms need and should have competing valuations. Ideally, entrepreneurs will list their company’s shares on multiple pre-IPO exchanges where they will be able to get a fair, trusted, and competitive price.
Platforms and Markets
// Carta Plans Private Share Trading Platform to Rival Nasdaq (FT)
Three updates I wasn’t aware of until this week:
Henry Ward, Carta’s CEO, said “he aimed to debut the CartaX exchange in the summer with an offering of his own company’s shares before expanding to other customers.” (This timeline seems to be expedited from earlier reports that the exchange wouldn’t be up and running until another 12 months.)
‘Companies on CartaX will need to be worth more than $1bn, report key financial metrics and float at least $50m worth of shares.’
The company raised another $180M led by Lightspeed Ventures.
After laying off 16% of the company, it looks like Ward has caught his second wind with his latest manifesto… “A Bias to Action.”
Investor Highlight
// Jason Karp is Founder and CEO of HumanCo — a mission-driven, private holding company. Previously, Jason was the Founder and CEO of Tourbillon Capital Partners, an investment fund that managed over $4 billion, and has over 21 years of investment experience at other multi-billion dollar investment funds. At the end of 2018, Jason decided to return all investor money and close Tourbillon.
I started following Jason Karp after hearing his interview on Patrick O’Shaughnessy’s podcast Opportunities in Public and Private Markets [Invest Like the Best, EP.86].
Note this conversation was in May of 2018, but a lot of what he says holds true to today. The first 15 minutes talk about the private/public dynamic. Here are a few comments that stood out:
“…if you look at 10 or so years ago, between 40% and 50% of the daily trading volume of stocks use to come from what they’ll call fundamental discretionary managers…today that number is less than 10%. So, 90%+ of all trading activity is coming from non-fundamental sources.”
“…the last five years, there has been an explosion of private capital…and the trends behind that are ironically linked to the trends that I said to you about what’s going on with public markets…”
“…there’s still a much more linear relationship between effort and outcome in the private equity space…”
I revisited this podcast after Jason re-packaged a post he wrote in 2015 this past week in both Twitter and Medium…The Dogma and Extreme Crowding of Classic Value Investing.
Company to Know
// FalconX is “the most technologically advanced digital asset trading platform” that allows you to access deep liquidity through a single account.
Last Wednesday the company announced it has raised $17M from a high-profile set of investors including Avon Ventures, Coinbase Ventures, Lightspeed, Flybridge, Accel, Fenbushi, and Accomplice. (As mentioned last week, sometimes it’s just as valuable to know who is buying as much as what they are buying.)
From TechCrunch… “FalconX’s tech helps provide pricing information for cryptocurrencies, offering what it calls the “best” price for a period of time (seconds). That might sound somewhat simple, but it’s not; the crypto world is made up of a host of exchanges, is awash with fake trading volume and has a history of being pushed around by large accounts. To be able to offer a price, and hold onto it, is material.”
Public & Private News
Trillions Are Flowing to Private Assets on Recession Front Line (Bloomberg)
‘Many are seeking an answer in private assets. Their returns are uncorrelated to public markets. And while they’re illiquid and hard to exit, monthly or even quarterly valuations mean they’re more likely to escape the kind of volatility that kills portfolio returns.’
AngelList Wants to Improve Comparing VC Fund Performance With New Metrics and Calculator (TechCrunch)
‘…(the hope is) that the new calculator and updated metrics will eventually help to make the venture industry more transparent and ultimately better able to communicate the asset class’ returns.’
Barrett Cohn of Scenic, “The Private Bank for Private Companies,” explains Why Covid is Hastening the Institutionalization of the Private Market
More valuation discounts, Monzo Faces 40% Drop in Latest Fundraising. (FT)
‘The sharp drop highlights how the pandemic is challenging unlisted tech valuations as growth slows and venture capital funds become more cautious about backing lossmaking companies.’
UBS Launches Push for U.S Super-Rich (finews)
‘UBS is launching a new initiative called private markets one-bank, led by Paul Crisci. The unit is to centrally manage the origination and distribution of all private market transactions.’
Fintech Platform iCapital Agrees to Buy Rival Artivest (WSJ)
‘Financial-technology company iCapital Network Inc. plans to acquire rival Artivest Holdings Inc. in a deal that would combine two platforms used by financial advisers to offer their qualified clients access to alternative assets like private equity.
Data
SoftBank Heads for Record Loss After $80 Billion Startup Spree (Bloomberg)
Thanks.