With growing grey market, is going public still necessary?

Here's a trend you rarely hear about: Canada's 'grey market' for trading stakes in private companies is growing. Fast.

Because there are so many up-and-coming companies with assets sexy enough to lure private investors, the market in which these backers swap their positions is expanding This arena, known as the grey market, has become so big that Canada's 25 hottest private energy names now have a combined market cap of $7.5-billion, based on where they trade – and some don't even have positive cash flows. Examples include Laricina Energy Ltd., Osum Oil Sands Corp. and Torc Oil & Gas Ltd.

The growth of this market has drastically changed the way management teams think. "Until the last two years, the option to not go public was never really an option," says Dann Cushing, a former Bay Street liability trader who has started up a new firm called Liquidity Source that is dedicated to serving the grey market. "Everybody needed a liquidity event of some type," he added, inferring that a company either needed to go public or get bought so that its private backers could cash out.

"There are now a few companies that are starting to [say] 'We don't need the public market. We can add more value staying private,'" he said. And not only can staying private add more value, it can also help firms escape the "wickedly volatile" public stock markets.

Mr. Cushing is well versed in the grey zone. As a former liability trader with stints at Goldman, UBS and Canaccord, he used to help private backers buy or sell stakes. That experience, he says, made him realize how little transparency there is in the market. And, as always, with little transparency comes enormous spreads that benefit the dealers.

Seeing this trend, he decided to try something on his own, and has set up his shop to serve the grey market by helping to provide more transparency. To do that, he modelled the company off of firms south of the border such as Second Market and Sharespost. Now a private backer who just bought into Osum's latest $500-million private offering can turn to Liquidity Source instead of a liability trader.

But it is important to note that Mr. Cushing isn't saying that a growing grey market will stop all firms from going public. Far from it. Laricina's IPO, for instance, is still expected for 2012. It's just that the grey market gives smaller firms more options. Now, at the very least, they may have an option to delay their IPO because private backers won't be so scared to invest out of fear their money will get trapped.