For many years and for many M&A professionals, being able to locate targets or capital in a cost-efficient manner has been an elusive target; especially in middle market deals and emerging economies. Now things are eventually starting to change with the introduction of the private market electronic exchanges (as I would define them) such as Sedondmarket, Sharespost, Cathedral Partners, Merger ID to name a few. These platforms constitute exchanges for non listed companies where M&A professionals can source deals. However, the breakthrough, to my opinion, will come from private investors as well as growth in emerging markets. Private investors are becoming interested in selling securities that they may have received as part of compensation or participate in promising pre-IPO companies. This trend will be supported by Generation X’s and Y’s familiarity with social networking as they become active members of the investment community (just to attempt a risky comparison the Ebay model may have many more applications; one of these being in some ways the private markets).
On the other hand these platforms can serve as the bridge between private capital in developed markets and investment opportunities in emerging markets. Although large institutional investors are present in emerging markets, the majority of opportunities there are of small and medium size, hence overlooked. Thus middle market is for many years plagued by adverse selection and underestimated, especially in the cross-border space. Electronic marketplaces can help with communicating opportunities and local expertise and provide the necessary transparency to increase investor confidence. The final step for the wide adoption of these platforms will come, in my opinion, when they become part of the Best Execution/MiFID framework but there’s some way until we get there and in the meantime they’ll have to prove that they’re sufficiently liquid and efficient. Price transparency and system integrity would also have to be proved to gain user confidence.
Follow on additional services could be local market, tax and legal information, executive search and selection as well as my favorite: volatility statistics that will offer hedge fund managers with reliable risk profile for their private equity investments. These investments appear to have low beta and low correlation to other asset classes. That may be attributed to infrequent revaluation of such portfolios; something that may change with the introduction of fair value accounting and availability of reliable private market data.
Of course it’ll be some time until these platforms prove themselves but I have the sense that this time is not that far. Once they do they can change the landscape allowing for more transaction hence higher advisory fees, significant returns for knowledgeable investors and opportunities to grow for companies. Eventually these platforms will also become prized M&A targets themselves. As a matter of fact they can be more valuable as part of a suite of services than as stand alone businesses. Everybody serving high net worth individuals will get interested as well as companies integrating vertically or horizontally such as public exchanges, IT/communication companies and off course Private Equities that will be the main market participants and users. On the other hand once these platforms mature they’ll be cash cows and attract financial investors or strategic investors that will aim at developing certain M&A markets.
The above is only a summary on a subject that is of great personal professional interest. I have created a business pitch on this idea and would be happy to discuss further with like minded professionals and investors. Stay tuned for more updates on the topic.