The exchange has suspended more Russia-based companies (Kirsty O’Connor/PA)
(Picture: PA Wire)Last week, the London Stock Exchange Group announced it had made an investment into Floww, a venue for privately held companies who are seeking equity funding. These businesses could go on to become the multi-billion pound giants of tomorrow, so it’s entirely understandable that the LSE is eager to build relationships at an early stage.
There has long been a feeling that it is hard for suck firms to get funds, and even harder for investors who get in at the ground floor.
Mike McCudden, CEO of CrowdX – another UK marketplace for privately held companies – explains why so much momentum is now building behind this sector.
What’s a privately held company?
That’s a firm whose shares aren’t available on a traditional stock market. Ownership may be divided between the founders, key staff and some early-stage investors, but it’s difficult to buy and sell these shares. And whilst many of these companies may struggle to grow in the long term, it’s worth remembering that the Amazon’s or Microsoft’s of today were once small, privately held companies. Sniffing out the right investment today could yield significant results in the future.
The LSE already owns AIM as well as the main London stock market – why do they need to look at smaller companies too?
The LSE has said that it wants to be the first global exchange group that is genuinely indifferent as to whether a company is public or private. It sees expansion here as being another step in this journey.
But who wants to invest in private companies?
Over the last 15 years we’ve had ultra-low interest rates, and more recently there has been rampant money printing – or QE – from the central banks. That means that the valuations of companies listed on stock markets globally have become hugely inflated. Many see the only way from here as being down, but because private companies are harder to invest in, their valuations tend to be seen as more realistic.
Listed companies have rigorous reporting requirements – how do I know a private investment is sound?
Investing in these markets is limited to professional investors, institutions and people like staff and directors of the firm, which goes some way to emphasising the regulatory stance here. However, that’s why we’re seeing a range of FinTech platforms emerging to provide better transparency and automation. By having an intermediary take charge of investment opportunities being reported against a common template, the idea is it’s easier to find investment opportunities and make balanced investment decisions.
Why is this only happening now?
Two factors. demand from investors – the buy-side – to tap into the market, and the technology. Machine learning and AI means that it’s easier to understand whether these companies will be sound investments without needing teams of accountants to do the heavy lifting. Historically, this was time consuming and resource intensive, which also made it expensive in terms of fixed costs. If a company wants to raise £2 million, paying £200,000 in fees looks like bad value, but the tech centric approach makes this a lot cheaper.
Are Floww the only people doing this?
Not by a long stretch. CartaX in the US has shown that these aggregated models can work well, working with affiliates to manage over $1 billion in secondary market volume to date and become a company with a multi-billion dollar valuation in the process. US brokerage Forge which bills itself as the stock market for private companies has also started to offer software for businesses to manage secondary share transactions, whilst Nasdaq has set up a marketplace with price discovery tools to facilitate pre-IPO trading in privately held stock. Closer to home, a new FinTech disruptor is CrowdX, established by a team of liquidity and capital markets specialists and launched last year. They provide companies typically valued at between £5m and £50m with an efficient route to equity funding, secondary market liquidity and also pave the way for a full IPO if desired. CrowdX also notes that it demands transparency and a focus on Environmental, Social and Governance attributes from its participants.
Is this just glorified crowdfunding?
No, but it could be seen as the next step. Crowdfunding has been maligned by too many poor-quality investments and investors being left with no way to sell their holdings at a later date. This new generation of platforms qualify – to various extents - the investment opportunity before helping private companies either find buyers of their first shares, as well as offering a liquid secondary market which is open to institutions and qualified private investors alike, then ultimately for some that exit via IPO.
Why is competition here important?
The big challenge facing many of the smaller listed companies in the UK right now is the sheer cost of maintaining their presence on the stock market. This is an expensive business and without effective competition to help private companies access public capital, there will be no incentive to bring down prices. Innovation will also suffer and many simply won’t be able to afford to participate, keeping participation low. Plurality is critical to ensure that this model can work for issuers of all sizes, helping them grow into the companies they want to be, rather than leaving them unable to access the funding they need for growth.
Mike McCudden is CEO of CrowdX – a new capital market for privately held businesses. www.crowdx.co.uk
