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A New Era of Private Company Liquidity: Leveraging the Private Securities Market

Private companies face distinct challenges when managing liquidity, raising capital and planning for future growth. The London Stock Exchange’s Private Securities Market – making use of the government’s PISCES (Private Intermittent Securities and Capital Exchange System) framework – aims to help private companies tackle these difficulties throughout the different stages of their growth. 

The new market is designed to enhance liquidity for different types of private companies, helping them to develop their shareholder base.

What is the Private Securities Market and what will it do?

The Private Securities Market will stand out from other ways of generating liquidity: uniquely, it allows companies to control the process and to benefit from the efficiency of public market infrastructure. The new market will enable intermittent trading in a private company’s shares, providing liquidity at planned intervals, with a proportionate disclosure framework designed for professional and sophisticated investors. By aligning disclosure requirements with market windows and providing predictable investor protections, the market will make it easier for private companies to manage liquidity, to facilitate investor access, and to develop their shareholder base.

The market will be available for a variety of different investors, including institutional and sophisticated investors. All existing shareholders of participating companies, including company employees, will be able to sell shares, with eligibility criteria for buying investors set in legislation. The Private Securities Market will enable companies to run permissioned (closed) auctions, allowing them to set additional parameters around who can purchase shares. In this way, the market will be flexible enough to cater for companies looking to diversify their capitalisation table and those seeking to consolidate ownership, all while managing the needs of existing investors with different liquidity time horizons. 

Our new market will help companies of all types achieve their desired outcomes, while maintaining control over their capital structure. A company may be backed by venture capital or private equity, be founder-owned or family-owned, have gone through crowdfunding or be a corporate subsidiary. Additionally, it may have a significant number of employee shareholders. The Private Securities Market is designed to help all of them put in place a structure that facilitates liquidity – and on a repeat basis if that is desirable.

If a company is on the pathway to an initial public offering (IPO), the Private Securities Market can be used to build a track record with investors, providing companies with the necessary experience and market exposure. But for companies that have no immediate intention of going public, the permissioned auction framework provides the flexibility to further their specific goals, without the pressures of public-market obligations.

The private company landscape

The private company universe is vast. In the UK alone, there are 2.1 million actively trading companies [1]. According to HarbourVest analysis, there are currently over 215,000 companies with either private equity or venture capital backing [2]. With such a huge population of companies, the liquidity needs of the companies are highly varied. Individual companies will have different motivations and needs for liquidity, as shown in figure 1.

Figure 1: How different companies can use the Private Securities Market

Angel / Venture Capital (VC) backed Typically, in the growth stage, these companies are proving their business models and have increasing working capital needs. They may be loss-making and funded by equity investments from venture capitalists and angel investors. Shareholders generally include founders, VC / angel investors and key employees with equity stakes. The capital structure often involves a combination of equity, convertible debt and preference shares. While these companies will often focus on primary capital to fund growth and achieve profitability, VC / angel investors’ liquidity needs will increase as the company matures, and individual investors meet their target returns.
Private Equity (PE) owned These businesses tend to have undergone several funding rounds and are more mature, later-stage businesses. They can be either profitable, or loss-making, but will be highly cash generative while building market share. Shareholders would include founders and employees with equity incentives, while private equity investors may have controlled stakes and / or significant leverage, with multiple share classes.
Family / majority founder owned With proven cashflows and potentially more predictable growth, these companies are more likely to be established and funded from retained profits or borrowing. Shareholders may be concentrated among controlling shareholders, sometimes extended to key management and employees with equity / options. As a result of the concentrated ownership, the capital structure is likely simpler, often involving a smaller number of share classes. Liquidity needs are determined by investor need, with triggers such as inheritance, retirement or disputes. These companies have less or no need for additional primary capital.
Corporate subsidiaries These businesses vary in size, with a single corporate parent, and may be well-established cash-generative businesses or newly formed / acquired businesses where the parent is seeking to strategically diversify its footprint. The capital structure will be simpler, involving ordinary shares. Liquidity needs are dependent on the parent company's strategic alignment and performance of the business. 
Crowdfunded Crowdfunded businesses are at an earlier stage, proving their business model, and with expanding working capital needs. They may also be businesses that have scaled, where the initial crowd is waiting for an exit opportunity. The capital structure can vary. Liquidity needs are mixed: they are higher once shares have been held long enough to qualify for tax incentives.

 

1Business population estimates for the UK and regions 2023: statistical release - GOV.UK
2How Does the Size of Private Markets Compare to Public Markets? - HarbourVest

How do companies plan to use the market?

In our discussions with companies about our new market, they welcome its flexibility. They have expressed interest in achieving one or more of the following outcomes:

  1. Managing differences in existing investors’ liquidity horizons. Where a company has gone through several funding rounds, shareholders who participated in earlier rounds may have a higher need for liquidity than those who participated in later rounds. The Private Securities Market can be used to put in place a framework to manage these differing liquidity needs over time.
  2. Attracting, incentivising and retaining employees. Liquidity for employee share incentive offerings, giving employees confidence that they will be able to realise value from these incentives over time, rather than waiting for a single and potentially uncertain exit event to crystallise value, such as trade sale, a private equity sale or an IPO.
  3. Allowing founders / families to sell down shares. A large block of shares could be sold using our new platform, making use of repeat auctions to unwind a position over time.
  4. Consolidating the capitalisation table. Companies with a long tail of small shareholders could make use of a permissioned auction structure to set minimum transaction sizes for buyers, allowing many small selling orders to match against a smaller number of larger orders.
  5. Rationalising the capitalisation table. Companies with multiple classes of shares seeking to clean up their capital structure may use the Private Securities Market as the catalyst to agree a more appropriate structure with shareholders, potentially involving amending rights to existing lines, moving shareholders between different lines of stock and / or consolidating lines of security to put in place a structure that can facilitate liquidity on a repeat basis.
  6. Offering liquidity to internal employees / existing shareholder market. Where companies believe that there’s sufficient selling and buying demand within their existing shareholder and employee base but are seeking to use a transparent pricing mechanism underpinned by the PISCES regulatory framework, a permissioned auction structure could be used to narrow down participants.
  7. Building the broadest possible distribution (open auctions). Some companies might not want to limit participation in their auctions, preferring to reach out to the largest possible audience of investors that qualify under the PISCES regulatory framework. This may be attractive to companies on the pathway to an IPO, or where they are already disclosing a significant amount of corporate information to a broad set of existing and potential investors, e.g. via their website.

How you can get involved

When our Private Securities Market launches later this year, it will bring new era of private company liquidity. If you’re interested in hearing more – or you think that you might want to make use of our new market when it launches, please get in touch with our team.

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