Genesis of Private Exchanges
The exchanges capitalize on the increasing impatience of investors for returns on their money as well as their willingness to accept smaller returns given the economy. “If you can’t answer the question, ‘When do I get paid?’ with the answer ‘three to five years’ for a reasonable investment, then most people are not willing to invest,” Dr. Pfaffle pointed out. The returns, he added, have shrunk from a 3x to 5x, to somewhere above 2x.
“Most of the time, if it’s a high net worth individual, I would say that the amount of investment is $500,000 to $1 million per individual investor and $5 million to $15 million per institutional investor,” added Dr. Pfaffle.
Two notable private exchanges that have emerged in recent years are SecondMarket and SharesPost. For the third quarter of 2011, SecondMarket’s Private Company Market reported its best quarter to date, completing over $167 million in private stock transactions. During the first nine months of 2011, SecondMarket completed $435 million in private company stock transactions, a 75% year-over-year increase.
Biotech and pharmaceutical companies accounted for just 1.7% of shares that private exchange members expressed interest in purchasing and a paltrier 0.5% of shares that members sought to sell during Q3. Still, biotech, along with advertising, generated the most increased interest over the past year. Leading both in interest to buy and interest to sell were consumer web and social media companies, followed by retailing and commerce firms.
SharesPost did not respond to questions by GEN, but its website includes profiles of four biotech companies: Navigenics, Nodality, Response Scientific, and XDx. SecondMarket’s website includes profile information for the investment fund Biotechnology Value Fund L.P. as well as 44 biotechs, 243 pharma companies, and 149 companies with “therapeutics” in their names. That does not necessarily mean all those companies have traded on SecondMarket, which won’t disclose which companies are trading, usually at the companies’ request.