Market sizzles as investors get in early

Barry Silbert was born to trade.

By age 10 he was swapping baseball cards at collectors' conventions. At 15, he ploughed his savings into shares that lost him US$2000. And as a 25-year-old banker for the creditors of Enron, Silbert travelled the globe after the firm's 2001 bankruptcy, flogging Enron assets.

He's been a registered broker since he was 17.

Today, Silbert, 34, is the best-known player in a sizzling market: the trading of shares of private, venture-backed social-media companies such as Facebook, LinkedIn and Twitter. As CEO of New York-based SecondMarket Holdings, he is building the go-to forum for trading these shares, whose rising values are making him rich.

Based on first-quarter results, SecondMarket could broker US$1 billion in private-company shares this year, taking fees of from 3 to 5 per cent on each trade. Last year Asian investors bought a 10 per cent stake for US$15 million, valuing Silbert's 35 per cent stake at US$52.5 million.

Like many tech-driven entrepreneurs, Silbert is certain his venture is changing the world.

"The money that we are freeing up is being reinvested in other venture-backed startups - and creating jobs. This market we're building is critical to the whole capital-formation process."

The shares of private companies have become a hot market. The value of all private-share transactions was US$4.6 billion last year, up from US$2.4 billion in 2009, according to Nyppex Holdings, a New York broker-dealer and research firm. This year, says the firm, that figure could reach almost US$7 billion.

Investors are eager to get their hands on the private stock of such companies as Facebook and Twitter in anticipation of big profits when they go public. Yet, the shares trade in a sometimes opaque market that is open only to a relatively privileged class.

Regulators have yet to address what some analysts see as a fundamental issue: allowing private-company shares to trade in quasi-public markets without full disclosure.

However Silbert says his clients know they are taking chances. "Institutional investors are sophisticated and they understand the risks," he maintains.

SecondMarket's most serious competitor is California-based SharesPost. Other rivals include Gate Technologies in New York and Xpert Financial, of California.

How much financial information do companies whose shares trade on SecondMarket have to disclose? As much or as little as they want. "There's a real dearth of information about these companies," says Larry Tabb, CEO of Tabb Group, a capital-markets research firm. "Are investors trading blind? With illiquid securities, you almost have to be."

Silbert characterises SecondMarket as an eBay for illiquid assets. Most trading is initiated by phone or the firm's website. The sellers are usually former employees and early-stage venture capitalists. The buyers are hedge funds, wealthy investors and other venture capitalists.

Sellers can post their offering price and the number of shares they are selling. Buyers either agree, make lower bids or use the site to set up meetings to negotiate offline.

Silbert's growing customer base has tracked the soaring price of Facebook stock, among others. Buyers and sellers signed off on a trade of US$10 a share in April 2010, implying a valuation of US$22.7 billion, according to SharesPost. By mid-April of this year, the price had risen to US$32.50 a share, or US$73.7 billion.

"People aren't buying Facebook for its revenues in 2010," says Lou Kerner, an analyst at investment bank Wedbush. "They're buying it for what it's going to be doing in 2015. We believe if it were public, it would be worth in excess of US$100 billion."

"From a fundamental standpoint, it's ridiculous," says Stephen Grant, a private-equity banker at internet Securities in California. "There are no fundamentals, just a couple of P&L [profit and loss] figures."

Still, he says there's a logic to the clamour to buy Facebook shares. "What people are buying is Facebook's 600 million active users. They are heading towards a billion, and that's one-seventh of the world's population as your customer base."

Silbert says his role isn't to judge whether social- networking stocks are a bubble - though he points out that plenty trade for far lower valuations than Facebook. "It's not up to us to determine what the fair market value is," he says. His mission, instead, is to get private companies comfortable with the idea of trading their shares.

Silbert lets each listing company decide how often its stock can trade, whether employees can buy or sell and whether institutions such as hedge funds are allowed to buy. His 3 to 5 per cent fee is split evenly between buyer and seller.

His success at matching buyers and sellers has made SecondMarket's own private shares valuable. In February 2010, Singapore's sovereign-wealth fund Temasek Holding and Hong Kong-based Li Ka-shing Foundation, which helped bankroll Facebook, bought a combined 10 per cent stake in SecondMarket for US$15 million, valuing the company at US$150 million.

- BLOOMBERG