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August 14, 2007
Taking it private
A new private trading market is set to open tomorrow. This market is only open to what the SEC calls "Qualified Institutional Buyers - QIBs" which are investing institutions with at least $100 million in assets. The new market, called Portal Market, will be run by NASDAQ and will trade in shares of private companies. Since the market is only open to QIBs, it does not fall under the regulatory oversight of most securities laws. I'm sure a lot of ink will be used to explain why investors will flock to this non-regulated market -- and why companies will seek to go private using this and other vehicles. But, one of the major factors is not the regulatory burden, it is investor behavior. As today's Washington Post story -- Nasdaq Gives High Rollers A Market Free Of Regulation -- points out:
These markets are creating an alternative and exclusive investment world buffeted from the turmoil that has roiled the major stock indicators in recent weeks. In the public markets, investors dumped stock during a credit crisis caused by the deteriorating mortgage industry. Private-market traders generally are sophisticated financial groups that take a long-term view of their investments.
"One of the problems that business faces in America today is what I would call 'short-termism,' " said Howard S. Marks, chairman of Oaktree Capital, an investment firm that was the first to list on the private market developed by Goldman Sachs called GSTrUE.
The short-term focus of existing equity markets is a strong pull to go private. Some argue it is easier for private companies to sustain innovation - compared with public companies who have to show results every quarter (for example, see The Gartner Fellows: Clayton Christensen's Interview Part 1). Maybe this new market will put pressure on the public markets to take a longer term view. Then again, should the new private market be dominated by hedge funds seeking the short-term alpha, it might just end up like a rich man’s version of what some see as the casino on Wall Street.
Posted by Ken Jarboe at August 14, 2007 9:31 AM
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