The United States houses one
of the most vibrant and innovative capital markets in the world, and Oaktree
Capital Management’s initial offering of shares on Goldman Sach’s private GS
TrUE (Tradable Unregistered Equity) exchange, launched in May, is the most
recent example of innovation in action. By selling shares to accredited
investors via GS TrUE, instead of going public on the NYSE or Nasdaq, Oaktree, a
Los Angeles–based alternative investment manager, avoided onerous and costly
registration and disclosure requirements while maintaining a level of privacy
unachievable in a U.S. public offering.
 Whether private exchanges like GS TrUE are good for investors,
issuers and U.S. capital markets, however, is a matter subject to debate. While
one can question the fairness of Oaktree making its shares available only to
institutions and investors who can afford to be in private equity and hedge
funds, while leaving out retail investors, I would argue that the issue of
fairness is a red herring. Oaktree shaped an offering to be sold exclusively to
accredited investors. Private deals targeting this same client base are floated
every day. The rules exist and the market opportunity was there.
The emergence of alternate private exchanges, much like the
rise of "dark pools" such as Liquidnet, is a function of market opportunity. GS
TrUE is an outgrowth of the accredited investor rules, Sarbanes-Oxley,
institutional investors’ abundance of cash and a scarcity of new blue-chip
supply. Clearly, Oaktree benefited by avoiding SEC oversight and public
disclosures by issuing on GS TrUE, but the company played within the accredited
investor rules and in no way pushed the boundaries as they exist. It simply took
advantage of its track record, reputation and investor demand to float shares at
an attractive valuation without providing more information than was required.
This is smart and opportunistic corporate governance, nothing more.
The harder question is what impact this will have on U.S.
capital markets in general. The success of private exchanges allows a pool of
the most desirable public IPO candidates to opt out of the public markets. Not
every company can succeed in the private market. A viable company is one with a
strong track record and seasoned managers who can clearly demonstrate leadership
abilities and favorable growth potential to investors performing due diligence.
If Congress and the SEC want to see a robust public market, they
have some work to do. |
Oaktree, for example, has a 12-year history as a blue-chip
institutional asset manager, a product set squarely in the growing alternative
asset management space and a team of senior managers who are respected veterans
from Trust Company of the West. An emerging company, or a firm with a product
subject to consumer whims or government regulation, would hold less obvious
appeal to investors in lightly regulated private placements, as it would be
difficult to forecast earnings and assess risk without the data available for
publicly traded companies.
This does not mean every blue-chip IPO candidate will choose a
private exchange. Some will want a broader shareholder base than the limit of
500 on the private exchanges; others may feel that, because of their consumer
appeal, they could command a premium valuation in the public markets. In the
case of Oaktree, the company did not have to become listed anywhere, but the GS
TrUE structure gave it the best of both worlds: the liquidity it desired and the
high-quality product investors wanted. In the absence of material changes to
Sarbanes-Oxley and the rules by which public companies disclose their
activities, private exchanges facilitate issuance by blue-chip companies that
might not happen otherwise. This is good for the financial system, issuers and
investors because it facilitates capital formation and liquidity.
But if Congress and the SEC want to see a robust, inclusive
public market that is attractive to all issuers, they have some work to do.
Disclosure requirements need to be clarified and simplified. The costs of
compliance, particularly for small- and medium-size firms, have to come down.
While confidence in a firm’s financial statements and disclosures is absolutely
critical, the burden of compliance shouldn’t impede the ability to deliver goods
and services and to create value for customers, employees and shareholders.
Until this happens, private exchanges will continue to play an important role in
the capital formation process.
Art by Matt Mahurin.
Roger Ehrenberg is president and chief operating officer of
Monitor110, a New York–based financial intelligence firm, and author of the
business blog Information Arbitrage.
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