Exchange is open, but no deals so far

Nasdaq OMX launched its private-company exchange last year but is still looking to complete its first transaction.

Heralded two years ago as a much-needed exit option for venture capital and private equity investments, the exchange — PORTAL Alliance LLC — was formally launched in September. There are “a number of deals” in the pipeline, according to Jolene Libretto, spokeswoman for Nasdaq OMX Group Inc., New York, in an e-mailed response to questions.

Until recently, the private exchange was used mainly for debt transactions, but the hope is that it will become a place for institutional investors to gain liquidity from their equity interests in private companies, he added.

PORTAL Alliance and other private-company exchanges came to the fore in 2007 when Apollo Global Management and Oaktree Capital Management LP listed on investment bank-run private exchanges including Goldman Sach's GS True. Industry insiders were hoping the new exchanges would become a viable exit option for private equity and venture capital firms' portfolio companies as well, especially now that firms are keeping companies much longer than they had planned.

But the banks' platforms had few issuers. For example, GSTrue currently has just two issuers, Apollo Global and Oaktree Capital, said Ed Canaday, Goldman Sachs spokesman. He added that the private equity firms are expected to switch to the PORTAL Alliance when trading begins.

SecondMarket Inc., New York, has done better since it unveiled its private-company exchange on April 23. About $130 million in shares of private companies have been traded, with another $275 million listed for sale by 30 issuers, said Adam Oliveri, managing director and head of the private-company market at SecondMarket.

In early December, the National Venture Capital Association and SecondMarket agreed to collaborate on conferences, webcasts and other services in hopes of enhancing services to venture capital firms.

PORTAL Alliance was first announced in 2007, but was delayed after a few of the partners including, Lehman Brothers Holdings Inc., Bear Stearns Cos. Inc. and Wachovia Securities were sold or went bankrupt. The alliance was again unveiled in September, with nine banks agreeing to list future 144A or private company share transactions on the exchange. The banks are Bank of America Merrill Lynch, Credit Suisse Group, Deutsche Bank AG, Citigroup Inc., Goldman Sachs Group Inc., JP Morgan Chase & Co., Morgan Stanley, UBS AG and Wells Fargo Securities LLC., Mr. Aust said.

The banks decided to join with Nasdaq in a formal portal alliance to centralize liquidity on one common platform, said Bruce E. Aust, executive vice president of The Nasdaq OMX Group.

Mr. Aust said companies can file on the private exchange as a permanent way of gaining liquidity and transparency or as a precursor to an initial public offering.

Mark Heeson, executive director of the National Venture Capital Association, a Washington-based trade group, said private exchanges represent a viable option for venture capital and private equity firms.

“Anything venture capital firms can do to get liquidity into the system will help the firm, their (portfolio) companies and their investors,” Mr. Heesen said. “SecondMarket is trying to bring liquidity at an earlier time. They're all viable options that venture capitalists are looking at.”

Venture capital firms typically have to hold onto their portfolio companies much longer today than in the past. The time between initial investment and sale has increased 73% to 5.69 years during the past eight years, according to data provided by NVCA. Meanwhile, the time from investment to IPO has grown 43% to 5.54 years during the same time period.

Still, many venture capital firms generally prefer to stick with tried-and-true exit strategies such as IPOs, selling portfolio companies or merging them with other companies.

“All things being equal I would rather list on Nasdaq or the NYSE,” said Kenneth Schiciano, managing director of private equity firm TA Associates Inc., Boston.

Nasdaq OMX does not view the new exchange necessarily as an alternative to a public listing. Rather, firm executives view it as a “stepping stone” to going public, Mr. Aust said.

The private exchanges should develop as the pipeline for public IPOs is restored, especially since the reporting requirements are much less cumbersome than a full public listing, he said. What's more, the information is only made available to the institutional investors qualified to trade on the exchange.

“The (private exchange) 144a market raised billions in the debt market and it has been used selectively as an equity facility,” Mr. Aust said. “The goal is to make more transactions for equity for qualified institutional investors.”