Rich investors who lack powerful connections usually have to sit on the sidelines and watch exciting new companies such as Alibaba and Twitter go public, generating riches for employees and others lucky enough to have obtained shares early.
When Twitter went public in fall 2013, underwriters priced the stock at $26 per share, but only their high-net-worth clients could buy stock at that price, says Sohail Prasad, co-founder of Equidate. Many other investors had to wait until the opening, at which point the price had soared to $45.10, giving it a valuation of almost $30 billion. That made Prasad wonder: “I’d believed in Twitter back in 2009; how come I couldn’t invest then at a $300 million valuation?”
Two online platforms that pursue different models—Prasad’s Equidate and CAIS—are now attempting to democratize access to attractive private companies that either are in IPO mode or will likely be in the future.
This comes at a time when the 2015 IPO market promises to be strong, according to Ernst & Young. In March, the firm reported that the pipeline for private-equity- and venture-capital-backed deals is strong; in addition, some 4,000 companies that have been held by private equity firms for more than five years will be looking for an exit strategy.
Institutional-Quality Access
CAIS is an online distribution platform that offers independent wealth managers access to IPOs and secondary offerings, as well as private equity funds and hedge funds.
“CAIS brings a single platform to the vast and fragmented wealth management industry that allows them to log in and get the same institutional-quality access that other advisors get when they’re sitting at big firms,” says CAIS CEO Matthew Brown.
The firm’s clients are independent/unaffiliated wealth managers at RIAs and independent broker-dealers who advise high-net-worth and retail investors representing some $4 trillion. “As a marketplace, we’re offering the tools or raw ingredients,” says Brown. “We’re not telling advisors how to put it together.”
To populate its platform, CAIS partners with 25 major Wall Street underwriters, issuers and offering sponsors. It also connects with major custodians, including Fidelity, Pershing and Schwab.
Advisors who have been qualified as members of the platform can log on and search a menu of initial and secondary offerings. The advisor can then place an indication of interest, which CAIS will aggregate and the bank will fill. In the two years since its capital markets business started, CAIS has done more than 350 transactions, say Brown.
The platform gives underwriters access to a deep pool of wealth management clients they would not normally reach. Brown says that more and more companies going public and the banks that are underwriting them realize the importance of broad diversification of quality long-term shareholders, “but there has never been an efficient way for a bank to reach the multi-trillion-dollar network of fragmented professionals.” CAIS, he says, represents deep, streamlined distribution to the wealth management industry.
Some analysts caution that the hype surrounding many IPOs can obscure the fact that the stocks of many companies that go public lack the fundamentals, are not profitable and will not provide value. Brown says CAIS works only with top-tier underwriters, and the onus of determining whether the companies they represent are a value proposition falls to them. “We look very carefully at the track record of the lead underwriter’s success and aftermarket performance,” he says. “The banks we work with have very strong records of success with aftermarket performance of underlying securities.”
Tapping Pre-IPO shares
Equidate, a start-up that launched in mid-2014, gives qualified investors early access to shares of attractive private companies by addressing a long-standing problem: As new companies remain private longer, employees who are early shareholders sit in a liquidity limbo, unable to realize any value from their equity until the company is sold or goes public.
Ernst & Young reported that at the end of 2013, the median period from initial equity financing of a company until an IPO was 9.4 years, three times longer than in 2011.
Equidate allows employees at pre-IPO companies who want cash now to list a portion of their shares or options on its platform for sale directly to qualified investors who are registered on the site. Prasad is quick to point out that the platform is not a trading platform for private stock. Employees do not sell the shares themselves. Instead, a derivative contract is sold that is indexed to the value and price of the shares. Buyers can cash in the contract when the company is listed or acquired.
“Before Equidate, finding a way to liquidate even a small number of shares in a growing start-up without involving the founders and board of directors was nearly impossible,” Prasad says. The platform is the only secondary market he is aware of that enables employees to sell their shares directly. Employees at pre-IPO companies such as Airbnb, Dropbox, GoPro and Pinterest have begun to “equidate” some of their shares, he says.
Not only do investors and shareholders benefit from this process; entrepreneur-employers do, too.
Here’s how it works: Employees list a part of their shares or options on the platform. Equidate then opens a two-week auction window, during which interested investors make bids based on information from third-party sources gathered by the platform’s data suppliers. In this way, a fair price is arrived at. When the auction is finished, Equidate identifies interested investors that fit the shareholder’s needs, ensures that prices are matched and agreed on and confirms that the shares and the issuing company are compatible with the platform.
Contracts can be closed as quickly as overnight. Paperwork for the transaction can be securely completed online and the employee-shareholder can almost immediately withdraw bank account funds via an automated clearinghouse. Purchasers receive settlement of their investment returns quickly after an IPO or acquisition. All Equidate contracts are anonymous.
Employers benefit in several ways, says Prasad. Equity ownership that can be monetized in a timely fashion helps attract and retain high-quality employees to companies that cannot offer big salaries. The capital infusion by outside investors improves employee compensation without the cost and effort of going public.
In addition, employer involvement is not necessary. Employers do not have to establish an agreement with a secondary marketplace, or obtain approval by the board of directors or buy-in from top management. They do not have to spend time and capital on a compliance process.
Moreover, because investors are buying the stock’s potential, not the stock itself, outsiders do not obtain voting rights or privileged information the company discloses to shareholders under federal regulations. And “equidated” shares do not count against the employer’s cap on how many shareholders it can have without going public.
