TMX Group Ltd. plans to launch an stock exchange for private companies, expanding its reach into a quickly growing market.
The initiative, announced Tuesday, is designed to complement the company's existing exchanges, including the Toronto Stock Exchange and the Venture Exchange. By adding a marketplace for private companies, TMX hopes to attract accredited investors who want to swap shares of private companies.
Although the majority of investors focus on publicly-traded companies, there is a sizeable grey market for wealthy and institutional investors who invest in private share offerings and seek to exit their positions. Without a functioning private market, these investors must wait for a company to be sold, or to go public, before they can cash out.
TMX's announcement comes just weeks after Nasdaq OMX Group Inc. formally launched a similar market of its own, Nasdaq Private Market. And Nasdaq itself launched its platform following the success of private marketplaces such as Second Market and SharesPost. These networks gained considerable attention in the U.S. after big name companies such as Facebook issued sizeable offerings of private shares before going public.
TMX's plans also come on the heels of evolving regulations for private markets. The Ontario Securities Commission recently released new proposals that will allow private companies to crowdsource their fundraising by selling small amounts of shares to mom-and-pop investors, as well as making it easier for companies to sell shares to their existing accredited investors.
"For us, this is just a natural extension of our ecosystem," said Kevan Cowan, group head of equities at TMX. The company already offers the Venture Exchange for junior companies, and adding a marketplace for private companies just takes their offerings for small-and-mid-sized companies one step further.
Similar marketplaces already exist in Canada, with brokers such as Liquidity Source Inc. who specialize in trading shares of private companies. The difference, though, is that these brokers currently operate in their own world and control the flow of information. To determine the price of a stock in the private market, clients must reach out to a handful of firms. TMX's plan is to create a centralized market that will allow anyone to determine the price of a private share.
The exchange operator faces an uphill battle. Because private share brokers already exist, TMX has to convince private companies that they have good reason to let TMX display the prices at which their shares are trading. Currently, regulators do not force these firms to publicly display what their stocks are worth – and they likely won't require them to in the near future.
"If you talk to [regulators], they try very hard to not get in the way of business," so long as investors are treated fairly, said Dann Cushing, who founded Liquidity Source and was formerly a liability trader at Goldman Sachs, UBS and Canaccord Genuity.
Another threat is that TMX could face competition from a rival exchange. Aequitas Innovations is looking to launch a new Canadian stock exchange, and observers expect that they will launch a private marketplace of their own.
Despite the challenge, TMX isn't entering the market with absolutely no help. The company already owns Shorcan Brokers Ltd., which historically facilitated trades in the bond market – a private market of its own, albeit with different securities.
There's also ample demand for a healthy grey market. Private equity investors who invest in energy or tech startups often have five-to-seven-year windows before they have to wind down a fund and deliver their returns to investors. If the firms are invested in illiquid private shares, it can be hard for them to exit their positions. A functioning grey market allows them to do so much more easily.