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Buying private companies on marketplaces of primary and secondary interests

AxialMarketCongratulations to the team at AxialMarket on raising $2m from First Round Capital and Windcrest Investments. I take this as a sign that they’re starting to gain traction among corporations and private equity funds, despite the fact they’re threatening the lunch of lower-tier business brokers and others who benefit from the currently highly inefficient, fragmented market for middle-market companies.

Literally dozens of firms have tried to create online marketplaces where private businesses can list themselves for sale. Historically, these tend to attract only the smallest companies (below a few million in revenues). I know only one professional investor who ever acquired a company he found in an online marketplace for private companies. Among the other examples of markets in this sector are BizBuySell, MergerID, and MergerNetwork.

AxialMarket has mitigated the legitimate and significant concerns that bankers and companies have about privacy by providing complete control for sellers to restrict the distribution of their transaction information to the buyers of their choice. Their hope, no doubt, is that over time more companies will use online tools and data sets to more efficiently target the best buyers, instead of relying on a given intermediary’s idiosyncratic network. An obvious analogy is how Facebook started off by positioning itself as a private, secure environment, and has steadily shifted its design to encourage users to make more and more of their information public.

Another avenue for sourcing private company interests online is from another PE fund, or in some cases other current holders of minority equity positions. 2009 secondary transaction volume for interests in private partnerships declined approximately 39% to $12.3 billion vs. $20.1 billion in 2008.[i] For unregistered securities in private companies, secondary transaction volume declined approximately 57% to $2.4 billion in 2009 vs. $5.7 billion in 2008.[ii] [NYPPEX Private Markets, "2009 Secondary Private Market Review and 2010 Outlook". New York, NY, January 8, 2010.] I understand that 2010 data reflects a significant rebound, although I haven’t looked at it.

To obtain access to secondary interests, funds have several offline and online options:

Look on the markets for secondary interests, such as SecondMarket (the market share leader), NYPPEX, and the PORTAL Alliance. These companies have a similar model to AxialMarkets, but in a different sector.

Approach a fund directly, particularly one that is in distress.

Approach investment banks specializing in secondary interests, e.g., such firms as Cogent Partners, Probitas, Triago, and UBS Private Funds Group.

UPDATE: Peter Lehrman, CEO, Axial Market, wrote:

Hi David – thanks for the blog post and the mention. Hopefully you’ll allow me to address one of your points as it pertains to business brokers.

We don’t in any way threaten or wish to threaten high quality business brokers. In fact, we’ve struck tremendously successful partnerships with qualified national and regional business brokerages to help them more intelligently and successfully serve their clients.

More fundamentally, we believe that selling a private business is a major transaction. No matter how small or big the dollar size is, it’s a major transaction for the owner, especially given that the preponderance of a business owners’ net worth is almost always tied up in the illiquid value of their business. Selling the business without professional help is almost always a ‘pennywise and pound-foolish’ decision.

As such, we usually advise business owners who approach us at AxialMarket to select a qualified M&A Advisor to represent them, and we’ve written about this on our blog.

The M&A process is complex and immensely time-consuming, one that requires judgment, specific skillsets, and experience. Great CEOs have good judgment and tremendous skill, but lack the time, experience and specific skills to run their own M&A process, not to mention take their eye off their business. That is why good M&A Advisors always more than earn their keep.

No online platform will ever replace what quality M&A Advisors do for their clients. If the business owner is a former banker, or is lucky enough to have a CFO or board member with strong M&A experience, then they can get by w/o a banker, but those exceptions only prove the rule.

In response: I agree 100% with Peter that AxialMarket and other competitors are not going to replace investment bankers. After all, we have very liquid markets for public companies, and still a lot of money is earned by investment bankers working on public company deals and similarly by specialists in block trading.

However, over time, I expect online markets for private companies to subtract perhaps 15% (an extremely rough estimate) of the value-add of an investment banker/business broker. Today, part of the value of a competent investment banker/business broker is that they can get potential buyers to pay attention to their emails. To some extent, AxialMarket et al. will commoditize that functionality. However, in doing so, they will allow investment bankers to focus more time on the other aspects of their job. They will likely also increase transaction volume, just as the decline in trading spreads in the public markets has dramatically increased trading volume. Similarly, SecondMarket is bringing more transparency to a set of very opaque and illiquid markets.


[i] Defined as gross cash proceeds plus unfunded commitments transferred for interests in buyout, venture, mezzanine, funds of funds, natural resources, distressed debt, real estate and hedge funds.

[ii] Direct investments include equity, convertible and warrant related unregistered securities in private companies and special purpose vehicles.

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Comments

  1. Hi Dave – thanks for the blog post and the mention. Hopefully you’ll allow me to address one of your points as it pertains to business brokers.

    We don’t in any way threaten or wish to threaten high quality business brokers. In fact, we’ve struck tremendously successful partnerships with qualified national and regional business brokerages to help them manage and market their opportunities more successfully.

    At a high level, we believe that selling a private business is a major transaction. No matter how small or big the dollar size is, it’s a major transaction for the owner, especially given that the preponderance of a business owners’ net worth value is almost invariably tied up in the illiquid value of their business. Selling the business without professional help is almost always a reckless and pennywise decision.

    As such, we advise every entrepreneur and business owner who approaches us for advice at AxialMarket to select a qualified M&A Advisor to represent them, and have written about it on our blog. Every month, we refer business owners to M&A Advisors b/c we know it will lead to a better outcome, provided you can access a quality Advisor.

    The M&A process is complex and immensely time-consuming, one that requires judgment, specific skillsets, and experience. Great CEOs have good judgment and tremendous skill, but they lack the time, experience and specific skills to run their own M&A process, not to mention take their eye off their business. That is why good M&A Advisors always earn their keep.

    No online platform can replace what quality M&A Advisors do for their clients, and never will. There are occasional exceptions, where the business owner is a former banker, or is lucky enough to have a CFO or board member with strong M&A experience, but those exceptions only prove the rule.

    Founder & CEO
    AxialMarket
    t: @axialmarket

  2. They are licensed and SEC regulated, if that’s your concern. They also let the private companies be involved in running the market for their own stock.
    by linda