Category Archives: Financial Markets

Topics related to financial markets (regulation, supervision etc)

Middle Market M&A heating up as Private Equity seeks growth

Global M&A value in the first three quarters of 2014 exploded to US$2.5tr up 52% from US$1.7tr last year, according to Mergermarket.  That points towards returning to the M&A boom levels of 2005-2008.  At the peak of that, global M&A value reached $3.7 tr. (M&A surge in Q3 2014, back to precrisis levels).

US represent around half of global activity with M&A value edging towards US$1.2 tr in the first nine months of 2014, already over the US$965 bn for the whole of 2013 according to Mergemarket and reaching towards 2007-8 territory.  Most of the increase has been fueled by the return of mega deals, ie those over $5bn.  Middle market deals although not following the same explosive pattern, grew as well. North American M&As between $250-$500m reached $54m during the first half of 2014 compared to $70m in all 2013. At the lower bracket $5-250m, M&A value reached $61m in the first half of 2014 compared to $102m for full year 2013.

Activity in the private equity space has lagged behind that of the overall M&A market. The first half of 2014 saw 432 buyouts in North America for US$80bn total worth. That was a 13% decrease from first half of 2013 (US$92bn) according to Mergermarket. Private equities, contrary to the past have stayed away from large LBOs and instead turned their attention to middle market and exiting past investments.

North American M&A Size Split 2008-14

Interesting highlights about middle market M&A and the Private Equity in the US:

  • Middle market matters: According to the U.S. Census, there are 360,000 middle size companies in America (with revenues between $5m – $1bn), 95% of which generate less than $100m but a large number of jobs. Mid-size companies increased revenue by 7.5 percent in the third quarter of 2014, compared with 5.5 percent for Standard & Poor’s 500 Index, according to the National Center for the Middle Market. According to Robert Slee, a researcher specializing in this area, 75% of middle size companies destroy value as they usually produce returns below their cost of capital (The New Math of Middle Market M&A, Robert Slee  The Value Examiner, July/August 2009).  Hence there’s significant potential for growth and value creation.  PEs get increasingly involved in this space and own around 10% of mid size companies, usually the top performers.
  • Middle market definition varies by region: Transactions involving middle market companies are considered those below $1bn in value, and more often below $500mn. Actually a good reference point are deals between $250-$500m and at the lower end between $100-$250m. That is according to US standards. Average deal sizes in Europe and Asia are almost 50% below those in the US. Therefore a deal considered middle market or even small by US standards might be a mega deal in the context of a cross-border transaction and by that attract much more attention from local regulators and communities.  Therefore, it has to be approached with increased level of diligence and sensitivity, reminiscent of that for mega-deals.  Well experienced M&A advisors can make all the difference in these situations.
  • Success is not straightforward in midmarket: Although the large number of targets and potential for value creation, it’s not easy to score a home run. Companies are often the extension of their owners’ lifestyles and not clearly distinguishable and investable (Private Equity 2013 Update and Success Factors for Value Realization).  So PEs often pass. In other occasions certain PEs will be the first time investors that professionalize a company and then sell to a more experienced PE to scale up the businesses.  Other difficulties arise from inefficiencies in locating interesting deals, limited attention span, liability risk, and high pricing. So often advisors and PEs complain that many good deals fall through the cracks.
  • PE changing priorities: go solo, go small, drop past weights and aim for growth

Top PE Investments

  • Exits: Not surprisingly, much of recent PE activity has turned into exiting older investments. This is not that easy. According to Mergermarket, PE firms are having difficulty to recoup boom-era investments (EMEA Deal Drivers 1H2014). Because of that, holding periods have increased to six years compared to around three in 2007 (PE Market Update 2013).  Secondary offerings are the most common form of exit nowadays, a change from the IPO heavy past, and represent a large part of middle market transactions as well. Seventy-three percent of PE managers in a 2014 poll expected to exit investments through secondary buyouts in the next year. More than half of respondents expected the industry to sell to a strategic buyer, with 39% choosing IPOs (Global Private Equity Outlook 2014-2015, Duff&Phelps, Shearman &Sterling, Mergermarket).

Private Equity Exits-Buyouts 2007-14

  • M&A Industry focus: much about niches. Certain sectors are more represented in middle market M&A such as consumer products, business services and manufacturing, while mega deals are more concentrated around healthcare, energy and tech, even though mid size deals also take place involving niche players. Private Equities in particular focus on consumer, TMT, biotech and subsectors in industrials, business services and technology.  Notable PE transactions this year: Red Lobster’s acquisitions by Golden Gate Capital ($2.1bn), First Data’s by KKR ($3.5bn), Ortho-Clinical Diagnostics’ and Industrial Packaging Group’s by Carlyle for $4.2bn and $3.2bn respectively (Preqin Quarterly Private Equity Update 1Q, 2Q 2014).
  • Middle market valuations rising: As middle market deals grow in popularity there’s increasing competition between buyers, be it PE firms or strategic investors and hence valuations are rising (with corporate acquirers having the advantage of synergies). This reduces the number of desirable targets and deals are becoming more expensive. Multiples (EV/EBITDA) for the $50-250m bracket went from 6.5 in 2010 to 8.5 in 1Q2014 another sign of increased market activity (Axial Forum, Valuation Inflation: Middle Market Multiples on the Rise, John Slater, Focus Investment Banking, July 9, 2014).  Multiples in larger middle market transactions ($500m to $1bn) have risen to 12x in 3Q14 according to Factset (US M&A Trends & News Oct 2014).
  • Future PE trends and the middle market: Even though the loss of spotlight to mega deals, the overall trend is positive.  PE managers polled by Mergermarket expect increased activity in 2014-15 (Global Private Equity Outlook 2014-2015, Duff&Phelps, Shearman &Sterling, Mergermarket). On average, cross-border transactions are expected to make up 30% of activity.  Main drivers will be consolidation, changing demographics and consumer tastes, technology, debt financing, PE exits, globalization and value creation. Success planning will create a wave of liquidity events as baby boomers that own mid size companies will retire. At the same time, although the consumer sector is cautious there’s always creative destruction and opportunity from new products. For example the Greek yogurt mania in the US created a new segment with explosive growth in less than ten years with a startup, Chobani, being the market leader. Finally, technology is creating ample startup opportunities.
  • Dry powder is at record levels but is not for free. The amount of available capital for Private Equity investment hit a record high of $1.14 tr in June 2014 globally, even higher than in 2006-2008, according to Preqin (Private Equity Has More Than It Can Spend). However the landscape has changed. PE deals are becoming more competitive and considering some boom era failures, managers have to prove their merits by bringing returns. Working only through sourcing inefficiencies, financial engineering or IPO exits are not enough to generate alpha.  Value creation has become more important (Private Equity 2013 Update and Success Factors for Value Realization). In this sense a secondary offering might make sense when the buyer has experience in a particular sector.  Actually there’s even talk about outright acquisitions of PE firms as well.
  • PE regulatory pressures and fair value adjustments: Another interesting development over the last years is that private equity companies now have to fair value their portfolios on a continuous basis for reporting purposes. According to SFAS 157 (a.k.a. ASC 820) under US GAAP as well as IFRS 13 under International Accounting Standards these equity investments should be recorded at market values, when listed or based on comparables listed companies if not and in the absence of both conditions on financial modeling. PE managers were not used to this level of scrutiny in the past.  This, apart from creating a lot of work for valuation professionals and back offices, it is also a source of frustration for deal makers who now have to support book values many of which were made under better times.  But it also adds transparency.


By Pete Chatziplis, CFA, ACCA, MBA. The articles published here do not necessarily reflect the views of the Transatlantic Business Forum.


GREK ETF, NBG and other ways for the risky to play the Greek crisis in the US

As a Greek bailout plan seems to be gravitating towards a yet again successful closure in its on-off year-long saga, the Greek stock market has been experiencing a robust rebound.

It’s no secret that the Greek stock exchange has plummeted over the last three years. Its capitalization from over $220 billion in 2007, has fallen nearly 90% to under $28 billion in November 2011. Following recent optimism for a successful closure to the bailout package it is experiencing a remarkable rebound. As a result the Athens Stock Exchange General Index reached 840 points in February 17 compared to a low of 621 almost a month ago. By comparison at the end of 2009, just after the last elections and before the crisis erupted it was at 2,900 points. At this time banks were trading at five times more than current prices or at over 2-3 times book value. Off course since them much of the book value has been eroded due to the devaluation of state bond holdings and loan losses resulting from the economic crisis.

There are some ways for US investors with risk appetite to gain exposure to the Greek crisis if interested. These are mainly the Greek ETF GREK and some very few stocks, mainly the National Bank of Greece (NBG). They might sound like a good opportunity for bottom fishing but be prepared that speculating here maybe a rollercoaster.

The GREK ETF tracks the FTSE/Athex 20 Index, which is comprised of the top 20 companies listed on the Athens Exchange by market capitalization. That limits, to the extend possible, risks from ASE’s low liquidity. GREK is heavy in banks (almost one third of its value) as well as some blue chip private companies, large utilities and state controlled companies. Greek banks in our opinion serve as a sort of hedge fund for small-size Greek companies and to some extent consumer and real estate market, albeit to lesser extend than US banks. Greek banks are coming back from the brink of collapse. If the Greek sovereign debt swap (PSI) and banks’ recapitalization takes place as planned, state funds will flow in in the form of common stock with limited voting rights. These common stocks could be bought back after an extended period; hence management will stay private and dilution will be limited. That’s not that bad of a solution after all; compared to the alternative of preferred shares, no coupon will be paid and at the same time the state can participate in future capital gains. Common stocks with extended voting rights however would be detrimental for stock prices even the banks themselves and the economy. Public corporations that are also heavily represented in GREK, have been largely earmarked for privatization. Hence they may realize some future gains resulting from the M&A process. They can also be benefited from increased flexibility in labor regulations and lower costs that are to be voted by the parliament.

GREK was launched by Global Funds in December 7, 2011. It should have been probably coming long time ago considering the media attention over Greece and ASE’s volatility. It offers the possibility for both institutional and retail investors to participate in the action. It also offers the possibility for diversifying existing portfolios in search for alpha solely from a quantitative perspective. Hopefully this will bring some attention and new investors to the Greek economy. It is traded in the NYSE (arca platform). It has appreciated by 36% in its 3 months of existence to close at $19.4 on February 17 compared to $ 14.2 at launch. Its trading volumes are still relatively low however compared to other Greek stocks; maybe it’s not that very well known to investors yet.

Another great way to invest in the Greek crisis is the National Bank of Greece (NBG) which is listed in NYSE through ADRs. Investing here however also bears the noise from the Greek banking sector’s recapitalization pains. The stock has been in a free fall over the last year but has rebounded considerably lately. NBG’s ADR almost doubled since the start of the year in the midst of uncertainty over Greece’s fate. It closed at $3.86 on February 17 while its 52 week high is $11.85. It seems the worst are over for Greek banks as current rock bottom valuations and almost option-like features, reflect bankruptcy fears for the country and its banks, as well as severe shareholder dilution from recapitalizations. These scenarios seem to be out of the table for now. NBG is the largest commercial bank in Greece (no connection to the Central Bank of Greece although its predecessor) and is state controlled. Although Greek banks have been devastated by their exposure to the public sector under the legacy Greek economic model, they have relatively limited exposure to non-performing consumer and mortgage lending and satisfactory commission income. NBG’s main advantage lies in its exposure to the booming Turkish economy through its subsidiary Finansbank as well as subsidiaries in the developing southeastern economies of Bulgaria, Romania, Serbia, FYROM and Albania. A further benefit may arise from gradual flexibility in labor regulatory framework and wage decreases if current legislative proposals take effect.

Coca Cola Hellenic Bottling Company (CCH) is one of the largest Coca Cola bottlers that is engaged in distribution in Europe. Its shareholders and managements are largely Greek. The stock has gained 17% since the beginning of the year. This stock doesn’t probably offer the highest exposure to the Greek issue, quite rightly so as it’s a blue chip consumer staples company with a strong brand name and diversified operations extensively outside Greece.

Some other stocks that have seen action the last days whenever news about the Greek crisis were coming out, are Greek owned shipping companies. These are companies mainly based in Greece that have been listed in the New York stock exchanges since some time (due to Greek securities regulations shipping companies cannot or choose not to be listed in the Athens stock exchange). Shipping companies operate under complicated corporate structures often utilizing offshore holdings hence they have small exposure to the Greek economy and probably limited correlation as well, we may say. Moreover, their operations, revenues and expenses are denominated in foreign currencies; often in US dollars (crews are largely non Greeks). However, being or sounding Greek seems to offer some exposure for some investors. Companies in this category are Excel (EXM), Dry Ships (DRYS), Tsakos (TNP), Navios Holdings (NM) and Navios Partners (NMM), Diana (DSX), Euroseas (ESEA), Paragon (PRGN), Danaos (DAC), Costamare (CMRE), Star Bulk (SBLK), Safe Bulkers (SB), Freeseas (FREE), Seanergy (SHIP), Stealthgass (GASS), Aegean Marine (ANW) who are Greece based and to some extent Genco (GNK), Eagle (EGLE) who are headquartered in New York. Not all of the above are the same as they operate in different shipping segments (ie tanker, containers, dry bulk, marine fuel). Excel for example who mainly operates dry bulk carriers trades at around 8-9 PE and its 52 week high is at $5.

Greek shipping is huge but unfortunately for the country not that much connected to the economy, due to its offshore status. As said, speculating in these stocks in relation to the Greek crisis may only be offered for momentum trading and in the short tern in our opinion, while longer term potential should better depend on fundamental analysis. The shipping sector is in rough waters again; the Baltic Dry Index has plummeted recently maybe over concerns for China’s and Europe’s cooling. One then has also to drill down by bulk, tanker and container markets for a better analysis.

Although the recent gains in the Greek stock market, this remains a very risky area, not recommended for the faint at heart. However, as history shows, most stock markets do rebound considerably after a significant crisis. It just then comes down to when one calls the bottom.


By Pete Chatziplis, CFA, ACCA, MBA. The writer may trade positions in GREK, NBG, EXM and other stocks named here. The articles published here do not necessarily reflect the views of the Transatlantic Business Forum.

Private Company Exchanges: $10 billion market but one size doesn’t fit all

Had a great opportunity to listen first hand from Barry Silbert, CEO of Secondmarket, Peter Lehrman, CEO of AxialMarket and Daniel Confino, Founder of MergerID about market trends and different approaches among private company exchanges so thought of sharing. The discussion was organized by the Harvard Business School alumni of New York and held at KPMG’s New York offices (Innovation in Private Company Liquidity, April 4, 2011). Dan Burstein, Managing Partner of Millennium Technology Value Partners and David Weild, former Vice Chairman of NASDAQ also participated.

Private company exchanges (PCEs or online liquidity pools as we like to refer to them) may not have yet gained broad awareness or widespread adoption but they are making headlines by facilitating trading in hot, not listed stocks like Facebook, Twitter, Linkedin, Groupon or Zynga. It is by trading on SecondMarket, that Facebook’s implied valuation skyrocketed to $5obn. As these transactions have lately attracted SEC’s attention and Warren Buffet’s cautionary comments, let’s emphasize that valuations in these platforms are set by demand and supply among sophisticated investors; so it’s a “big boys” game in arm’s length transactions. It is believed that Facebook and some other hot private companies’ stocks have achieved such dispersion and active secondary trading that the line between what’s considered private or public is in essence blurred.

Apart from blocks of stocks, whole companies can as well change hands on these platforms. These “control transactions” aim to create liquidity for business owners and assist their advisors in consummating transactions. As exchange listings might be too cumbersome due to increased regulation and overhead or traditional offline M&As processes might be lengthy and costly, these exchanges create considerable efficiencies. This function is especially useful to middle market where is more difficult to attract buyer attention. More interestingly, they create opportunities for cross-border transactions, linking across global economies. For example, a US company that wants to enter the Polish market can easily research willing sellers there and make initial contacts. On the same time the Polish company can seek strategic buyers or investors around the world. That may erase inefficiencies that exist due to the fact that capital and investment opportunities usually reside in different locations these days. Capital has mainly accumulated in developed countries and opportunities arise in emerging with limited knowledge overlap between the two. This discrepancy in capital supply and demand create inefficiencies that may lead to misallocation of capital, value destruction and wasted resources; simply some capital is not put in use in the best way and companies on the other site may have to bear too high cost of capital and select projects with higher risk profiles to survive.

Benefits provided by this new technology doesn’t come without problems however Many investors or advisors, especially the “old school” often used to make deals face to face in golf clubs through long standing relationships, express disbelief. Some are worried that technology might take away businesses; some are turned away by dubious market participants. There’s some merit in that; quality of input is sometimes questionable. There are cases of buyers or sellers making false presentation of their abilities much like in a “push marketing” fashion; sometimes their intentions are not that innocent. Platforms are making efforts to remedy this by screening participants and providing research. In our opinion however, this poses a dilemma: should companies strengthen controls and by that increase operating costs, transaction fees and unintentionally drive away even legitimate liquidity or rate participants based on performance and simply caution buyers that some homework is required on their site? In the end, that’s part of the value brought on the table by knowledgeable advisors. We support the second option; see our views on operating models here.

As mentioned at the discussion, PCE adoption is increasing. Their establishment is pretty much a wish come true for many buyers, sellers and advisors spending immense amount of time and energy to communicate market opportunities. After all, we are living in a viral world; once an operating model proves itself it can grow quickly. According to the panel, it is estimated that PCEs is a promising market of $10bn. We would place the medium term target much higher. Another interesting point is that not all platforms are the same. Much like stock exchanges and darkpools, PCEs have different operating models and target different clientele. SecondMarket’s model focuses on pre-IPO stock while AxialMarket and MergerID are mainly geared towards control transactions and the middle market.

SecondMarket (formerly Restricted Stock Partners) was founded by Barry Silbert in 2004 to offer liquidity for restricted securities in public companies. Barry mentioned in an interview that had own experience in that from when working at Hoolihan Lockey and had to find buyers for parts of bankrupt Enron. SecondMarket gradually introduced trading for auction-rate securities, bankruptcy claims, limited partnership interests, structured products (MBS, CDOs, ABS), whole loans, private company stock, and government IOUs. Private stock was added two years ago. Trading is mainly geared towards pre-IPO companies and their employees on the supply side and venture capitals and high net worth individuals on the buy side. It has attracted much publicity and fame through trading stocks such as Facebook, Groupon and Linkedin.

SecondMarket surpassed a half-billion dollars in private company transactions since this market was launched in April 2009. In fourth quarter of 2010 transaction fees more than doubled compared to the previous quarter, to all times high (probably helped by the Facebook stock that accounted for around 40% of volume). At the same time market participants rose to 35,000 compared to little more than 5,000 a year ago. Companies with stock trading at SecondMarket, can control trading terms. It comes at no cost to them but sellers have to pay a 3-5% fee on transactions. According to Barry Silbert the differentiating factor between stocks traded at SecondMarket and traditional stock exchanges will at some point simply be the platform used. The companies would then choose the venue that better suits their needs. That’s interesting; after darkpools, stock exchanges may also see business taken away by PCEs in the future.

SecondMarket has already gained market recognition. It was named 2011 Technology Pioneer by the World Economic Forum and one of the “Top Fifty Tech Startups You Should Know” by BusinessWeek. Fast Company recognized it as one of eight startups “brimming with hope” for the financial industry. AlwaysOn Media named it as the overall winner of the “Global 250” list of the top private companies in the world.

AxialMarket (formerly Cathedral Partners) is focused on middle market control transactions basically catering to business owners. It was founded by Peter Lehrman with background in the Gerson Lehrman Group, the online community for on-demand consulting services. Peter is passionate for high tech B2B marketplaces, even where many thought they couldn’t exist. Probably that drove him to establish AxialMarket in 2007; outstanding foresight admittedly.

Since AxialMarket’s inception, over 3,000 privately held companies were sold through it. In the first quarter of 2011 over 500 opportunities, a 12% increase, with over $7billion in revenue and $800M in EBITDA were delivered via AxialMarket. Its platform includes over 1,200 qualified M&A advisors and private business owners. Apart from enabling transactions it also offers proactive research over targets and industries. AxialMarket follows a mixed subscription and transaction model. Most of transactions are concentrated in North America. It has strong presence in the US private equity industry.

MergerID is part of the Pearson/Financial Times group. It was founded by Dan Confino, a seasoned international M&A lawyer now based in London. MergerID leverages a strong global footprint and market insights to provide value added M&A information to its members. After all, Mergermarket a leading information platform for the M&A market, is also part of the FT group. MergerID focuses more on the CFO community and the middle market. It has adopted a membership model charging no commission on deals executed. In the first year of its operation (was launched in September 2009), over 25,000 matches between buyers and sellers have been recorded. Its platform includes more than 1,300 companies in 65 countries that is present.

According to Jonathan Goor, Managing Director of MergerID: “Through MergerID, users can effortlessly access a global audience. The interest in all the BRIC and aspirant BRIC countries as well as in the Middle East and Africa has been fantastic so far…” According to Mergermarket data, the total value of cross-border transactions rose by 60% in first half of 2010 reaching 31% of global deal value. Alongside the interest from western world to the BRICs, Mergermarket data shows that emerging market companies are also increasingly acquiring abroad. Outbound deal activity from the emerging markets has risen 318% by value and 111% by deal count in the first half of 2010.

The above platforms are not the only ones, however they are the early market participants and among the most popular. Many more new competitors have started to appear and raise capital (see our post on that here). Hopefully competition will increase product awareness and liquidity for private transactions. After all maybe PCEs are the best platform for investors and companies especially in middle market: in a stock market plagued by short-termism, analyst pressure, where average stock holding period has fallen to 6-7 months and high frequency trading accounts for as much as 70% of trading, PCEs can be a more suitable venue for some companies and long term investors (even though the motives for investing in facebook stock might be speculative..).

Will be interesting to see at some point research on the cost of capital for companies trading in PCEs versus that for listed companies (especially those not actively trading and not followed by many analysts). And one more topic to research: valuations and volatility of private equity investments based on data from PCE trading; we bet that portfolio managers, wealth advisors and accountants would love to see that.

The Transatlantic Business Forum is a portal, online community of professionals and consulting firm that aims to facilitate discussions on international business and especially between Europe and the Americas and promote and facilitate opportunities for cross border capital flows be it Mergers & Acquisitions, Partnerships or Trade. Contact at:

Moody’s downgrades Greek debt; says it’s speculative.. Really?

Moody’s today downgraded Greece’s debt by three notches down to Ba1, lower than Egypt’s. Pretty much beating a dead horse. Greece is mostly out of debt markets and will remain like that for a year or so until internal structural reforms take shape. EU periphery’s debt has thus become a mostly internal EU issue. Political rhetoric apart, EU is probably holding a tough stance to keep pressure on reforms. Greece for example has introduced all requested reforms but now has to leave time to sit in; while also increase tax revenues at least from unreported activity (Greece has high self employment rates and that’s not straightforward to tax).

EFSF’s chief Regling recently stated that Greece’s plan implementation is going well and that Portugal and Spain seem safe for now. Same point made by IMF’s European chief Antonio Borges on the back of Moody’s downgrade. There’s certainly room to maneuver when it comes to fiscal policy within the periphery, as well as ability to support from EU’s core. A default wouldn’t benefit anyone since European banks hold much of periphery’s debt. If EU wants to provide support through the EFSF or ECB, it certainly can. So this downgrade or subsequent market speculation might not make a difference. Internal reforms are policy measures that with solvency risk out of the picture, their resolution is going to drag for some time. Seems like a long trade for shorts; do they have the time for that? On the other hand seems that shorts have moved to the US$ in light of ECB’s interest rate hike.

There can be an alternative reading to this downgrade though (which by the way happened just days before EU’s leadership meeting and the day before Greece was supposed to tap into markets for a 6month T-bill issue). Could this just be another act in the clash between the EU and rating agencies? EU is skeptical of their ratings and have placed them under supervision (from the European Securities and Markets Authority) so this might be some power struggle play unfolding. Credit ratings seem to place themselves on the buyers’ side; is this some market strategy shift at least on the sovereign debt sector? Due to this timing it will also be interesting to see whether ECB will step in support Greece’s issue as probably did with Portugal.

And by the way, was anybody waiting for Moody’s to call Greece’s debt speculative just now? Following the crisis, rating agencies are under fire on all fronts. It’s only opinions they say they are expressing. Thank you, we have ours too (and as history showed any sophisticated investor should better have their own going forward too).

PS. Stay tuned for additional commentary on why fiscal policy on its own is not sufficient to take Europe’s periphery out of the crisis and why growth policies are urgently needed.

Related links:

Private stock exchanges update: Capital starts flocking in; great potential for this disruptive technology

Private stock exchanges is a popular topic for this blog (after all we have as well put together a business pitch for a platform as early as 2009; scroll to the end of the post for the link). We can’t help but revisit the topic as this new disruptive technology starts to gain acceptance, something that will rapidly revolutionize financial markets (and generate some good profit for their users and shareholders….). A long awaited useful tool for investment professionals this technology’s introduction hasn’t been easy and still has ways to go.

One of the earlier platforms, Secondmarket, was developed by a young M&A professional facing a common frustrating feeling among investment bankers that try to shop around large amounts of illiquid investments. It is however the trading of private stocks such as those of facebook that helped attract attention to Secondmarket as well as Sharepost; one more sign of business catching up with technologies in unintended ways. And this way, trading platforms started to become a way for private investors to tap into promising returns, once only accessible to private equities and bank clients through private placements. This has recently led SEC to investigate the valuation of securities in these placements to avoid conflicts of interest; one more indication of those platforms’ increased popularity. Other market participants such as MergerID (part of the Mergermarket/Pearson(FT) group) and Axial Market stay focused on outright sale of whole companies.

Market participants are increasing almost by the day and start attracting investor attention. GATE Technologies recently raised $3.6m of new funding from private investors. Xpert Financial, who raised $3m from famous venture capitalist Tim Draper in 2009, offers an SEC approved electronic platform for secondary offerings similar to Nasdaq. More competitors will probably appear as the market will follow the usual pattern of early product introduction: many early adopters vying to penetrate the market followed by consolidation around the fittest. At this point there’s room for all, as long as they have the necessary funding to reach sustainable operations. Existing platforms operate under different execution/membership models and focus in different markets allowing a choice of service to users, much as darkpools do in the traditional exchanges’ space.

What will be the critical success factor to our opinion is the ability to secure liquidity from both buyers and sellers, through aggressive business development and proactive communication of opportunities. System integrity and credibility is another important parameter which will develop as users and regulators become more familiar with the technology. At this point why wouldn’t regulators some day oblige financiers to execute deals through this platforms rather than offline if they are able to secure sufficient liquidity and better execution terms there (along the lines of the MiFID/Best Execution guidelines) further driving their adoption and trading proceeds?

Apart from trading in promising private company stock; there’s a compelling efficiency rational giving birth to such exchanges. Instead of wasting much of a banker’s time on market screening, cold calling, correspondence, etc, using an online tool one can minimize logistics and focus on the higher value parts of a deal (i.e. negotiating and deal structuring); keeping thus fees low and profits high. This way many more middle market deals will get done; even if don’t look that promising at first sight. There couldn’t be a better timing for this product due to capital demand from startups and mid size companies that need to grow out of the recession at the same time that are underserved by the banking system in the aftermath of the financial crisis.

Other product drivers are: increased familiarization with online trading/platforms (darkpools/online trading have changed the market landscape for traditional exchanges/brokers), increased use of social networking especially by the younger generation of professionals, globalization (in today’s world, sources and users of capital increasingly don’t reside at the same location) as well as increasing numbers of high net worth and knowledgeable investors. The latter can now bypass intermediaries through these platforms directly investing on targets. This can as well revolutionize wealth management. An interesting twist to that are platforms specializing in social investing/giving. These platforms can benefit the sizeable, at least in the US, nonprofit sector but also cure some inefficiencies and credibility problems there. Such example is the GATE Impact platform which is supported by Prudential’s Social Investments program.

Finally, but very importantly, this new technology can serve a great good to financial markets as it will increase transparency over private market transactions and provide a point or reference for finance professionals and regulators to value illiquid investments; a malady behind the latest financial crisis.

We will be following news with excitement and look forward to exponential growth for this product as well as M&A activity, especially in middle market.

You can see our views on the topic as well as the business case for one such trading platform in a presentation/business pitch we prepared as early as 2009:

The US recovery, the European debt Crisis and Gordon Gekko; still to the point

Ok, this post has a light tone; as much as one can observe the economy this way.

First about the European debt crisis: Portugal and Spain are coming into the spotlight. Most probably will be the next ones to seek IMF/EFSF support. That’s if the ECB or somebody else comes to aid. They will do so if there’s significant confidence over their policies; the jury is still out on that. That apart, everything looks like the Greek story all over again; one year later. The only difference is that while Portugal’s and Greece’s problems have the same culprit in their public sector, Spain’s problems come from the banking sector. If the same story is repeated, it should go like this: once government liquidity dries out the macro funds will attack driving up spreads. Why? Just think of Bud Fox asking Gordon Gekko why he had to break apart his father’s company:

Bud Fox: Why do you need to wreck this company?
Gordon Gekko: Because it’s WRECKABLE, all right?

Simple. Hopefully something good will come out of all this in a more coordinated EU economic policy.

Now coming to the US recovery: after all the drama about the double dip recession the economy seems to recover. Unemployment and real estate prices apart, the stockmarket and corporate profits are doing well, very well indeed. We are at the point that companies disappoint even when they hit the higher profitability in a decade as was the case with Ford recently. “Buy the rumors and sell the news” at its best. It seems that the FED has averted a prolonged crisis. However, I don’t think that quantitative easing will help reduce unemployment, at least not directly, as it used to happen in the past when lower rates could spur labor intensive investment. Times have changed and in a global economy unemployment is more of a structural problem that has to be dealt from market participants (in the absence of government interference). On the positive side though, I believe that FED’s strategy is rather forcing investors to flee risk free assets and invest in equities in order to counter future inflationary pressures. This will improve consumer feeling because of their inflated nests and also remedy the banking sector’s maladies by inflating real estate prices to catch up with historical costs.

Going back to the crisis though, what would Gordon say about where we are standing now?

Bud Fox: How much is enough?
Gordon Gekko: It’s not a question of enough, pal. It’s a zero sum game, somebody wins, somebody loses. Money itself isn’t lost or made, it’s simply transferred from one perception to another.

In other words: money was not lost; just transferred. Now has to go back to work. Won’t be surprised to see the Dow hit 2007-2008 levels by the end of the year. Sad to see the unemployment persist though and not being tackled. It seems as a social issue rather an economic one anymore.

P.S. Talking about Gordon Gekko my thoughts and wishes go to Michael Douglas. Wish him well. Great actor.

Regulatory Framework Overhaul- Hedge Funds and Tax Havens; but what about supervision?

There have been strong voices calling for revising the financial sector’s regulation including that for hedge funds throughout the financial crisis and leading up to the G20 meeting.  In this context the European Commission unveiled its much awaited draft proposal of a Directive on Alternative Investment Fund Managers.  The draft Directive will introduce licensing and reporting requirements for EU-domiciled managers of alternative investment funds. Once considered and approved by the European Council and the European Parliament, the Directive will enter into force, but likely not before 2011. The topic came up at a recent NYSSA panel that I co-chaired and a useful reference to that is provided by March MacHarg of Debevoise & Plimpton.

Outside Europe the G20 has decided to strengthen regulation globally with the introduction of the Financial Stability Board (FSB).  Actions in this front are yet to be clarified but probably are going to move slowly.  The US has outlined in the meantime a reform of regulatory framework that will probably steer much discussion and has already attracted much opposition but it seems that this is central to Obama’s administration agenda.  What I really find interesting in the discussion regarding averting financial crises are two points:

The notion of “Too big to fail” is under increased skepticism.  For years there was a theorem that when a company was too big somehow it wouldn’t fail. Probably there was the assumption that there was too much wisdom possessed within in, too many repercussions from a possible fallout.  At least the second was proved to be right with the Lehman bankruptcy but what people come to focus upon now is the connection between country GDP and financial assets at risk.  That along with the notion that as a recent NY Times article put it ”banks that, in life, are global in scope, but national in death when they become wards of the taxpayers” and that had at least brought to the knees whole nations like Iceland (UK, Switzerland, Belgium where also affected).  US is much safer when it comes to this ratio but still was affected.  Hence it will be interesting to see who will be footing the bill in the future and who will be regulating and supervising.  And that gets me to the second point: supervision.  There’s a saying that I’m familiar with saying that “there’re already a lot of laws what we lack is implementation (or supervision)” I wouldn’t like to draw examples from recent fallouts but clearly supervision is key otherwise people are just window dressing.  In this respect I’ve read with interest Britain’s hesitation towards a pan-European supervisory body although it accepts common regulation.  Some cite reservation over EU bureaucrats, probably different systems but this is one very interesting story unfolding.

On a different front the tax haven status of certain countries has come under increased scrutiny creating tensions even within European Union members and leading to review of bank secrecy laws in Switzerland and Luxembourg. 

Related Articles:  European Commission unveils tough hedge fund directive, The Telegraph 29 Apr 2009, Reuters Summit-Regulatory heat turned up on hedge funds, Reuters, Tue Apr 28, 2009, UPDATE 1-Eurogroup’s Juncker: no clear way out of crisis, Reuters, Wed Apr 15, 2009, Austria, Luxembourg, Belgium escape tax blacklist, euobserver 3, April 2009, U.S. financial regulation reforms outlined, Reuters, June 15, 2009, In Britain, an Aversion to Rules From Europe, NY Times, June 17, 2009, Brown agrees to common EU rules for financial oversight, . The Times (London) (19 June, 2009), Global coordination of regulatory overhaul falls apart, . Financial Times (free content) (17 June ,2009)

Limited effect from IFRS adoption in the US

A new academic study shows that there will be very limited if any effect from the adoption of IFRS in the US.  The study mainly focuses on effects in the capital markets i.e stock liquidity, cost of capital and stock valuations (the complete study can be found here).  It seems that companies that benefit from that are those early adopters in countries with relaxed regulatory or supervision frameworks.  That means that investors appreciate increased quality in reporting and disclosures from IFRS adoption as well as easier comparability.  However what it indicates is that the IFRS will not really affect the markets.  Professional experience have also showed that it will not significantly affect as well the overall compliance system as US GAAP are already a high quality reporting system and supervision in US is strict compared to other countries.  IFRS and US GAAP are also converting on various issues like in M&A accounting.  So this reduces the amount additional work that accounting professionals will have to perform.  The only issue is probably related to the cost of first time implementation as well as educating the professionals to the new standards and most importantly according me to a new approach on auditing which under IFRS emphasizes “substance over form”.  The SEC under its previous administration has manifested its commitment to a rather quick IFRS adoption which is yet to be confirmed by new management.  The Obama administration is also committed to the harmonization something that is within the topics of the Transatlantic Agenda as well. 

On a related issue PCAOB has put on hold for up to three years its plans to inspect any non-U.S.-based registered audit firm acknowledging problems with getting international inspections done.  Again this probably comes down to differences in regulatory frameworks.

You may contact me if you need information regarding differences between IFRS and US GAAP.

Related Articles: SEC: Early IFRS Adoption Will Cost Firms $32M, November 17, 2008, Study Predicts Little Benefit to Adopting IFRS in U.S, IFAC Applauds US Administration’s Support for Global Accounting Standards in US Financial Reform Proposal, IFAC June 18, 2009, PCAOB Votes to Delay Some International Inspections, ComplianceWeek June 26, 2009

Regulation for global fianancial markets

The G20 has decided to strengthen regulation globally with the introduction of the Financial Stability Board (FSB) that has been proposed to take this role at the G20.  Europe is very interested in that although there are such voices in the US as well.  Jean-Claude Juncker (Eurogroup’s head) statement that the Anglo-Saxon financial model is dead, regulation is needed.  It will be interesting to see developments in this area.  


There are various interesting question to be answered regarding global regulator; for example how possible that is considering differences in legal systems?  From another view in the past there were many concerns over too much regulation in the US (for example from Sarbanes-Oxley).  It was suggested that because of that NYSE was losing market share over the LSE.  Is this paradox? Will global adoption of IFRS help in this way?  I won’t argue the technical robustness of IFRS but what I find fascinating is the notion of “substance over form” which may make “window dressing” more difficult to defend in retrospect.