A new trading venue is due to launch in London next year to sporadically trade shares in private companies in an effort to attract more investors and improve liquidity in unlisted companies' shares, potentially encouraging start-up and growth companies to remain in the UK.
London Stock Exchange Group is working towards launching the intermittent trading venue, or ITV, in 2024. The group has been in talks for months with banks, brokers, regulators, law firms, private companies and investors to discuss the platform, but many issues still need to be resolved before it goes live.
The plan is to create a platform that allows windows for trading in private companies' shares at pre-determined and infrequent intervals, possibly once a month. The window would allow new investors to buy into a company and existing investors or staff to exit, providing much improved liquidity. The platform will be for trading of existing shares only, but the hope is that an ability for investors to trade in and out of companies' shares will aid fundraising as companies grow and allow them to stay private for longer if they want, while potentially bridging a gap between private and public markets.
"It is being developed to solve a very important problem: how to provide liquidity in shares of companies that are growing and scaling up," said Darko Hajdukovic, group head of new primary markets at LSEG. "It’s a real problem: companies are growing, they may want to bring in new investors or provide exit opportunities for existing investors and employees."
The plan is also part of efforts to ensure London remains the dominant European capital market when new listings are being delayed or cancelled and companies are choosing to stay private for longer – or to list elsewhere.
"This would be great for London," said Tom Thorne, a partner in the equities practice at law firm Linklaters. "There are two ways to look at ITV – it could be seen as a bridge to a listing, and the other is as a final destination, and I think it could be either. There are owners and shareholders of companies out there who want something different to the public market but want to create some liquidity."
The ITV is likely to involve auctions, adapting the technology used thousands of times each day at the open and close of exchange trading. "The auction technology has been very well tested in the public markets," said Hajdukovic.
Each company would be able to decide how many of the auctions to participate in.
The platform would be aimed at all stakeholders: early shareholders and venture capital or private equity funds can find exit opportunities; new institutional investors can gain access to companies they might not otherwise be able to invest in, or get in earlier in their lifecycles; and staff can trade shares too.
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Supporting growth
Alex Skrine, head of electronic trading at market-maker Winterflood Securities, has been involved in the discussions and is optimistic the ITV can fill a need. "As a traditional market-maker we have a shared purpose around supporting growth companies in the UK, making sure they have access to funding at the appropriate stage of their growth, with consistent pricing and liquidity in the secondary market,” he said.
“We definitely feel this is an important development in the market, and whether it’s the London Stock Exchange or another venue, we’re supportive of the initiative."
Thorne said he had spoken to a number of company executives who were interested. "There are a lot of early stage investors who come into these companies and they may be looking for an exit, but the IPO could still be two or three years off. So this provides an opportunity to make exiting easier for them," he said, adding the ITV could also provide better retention and attraction options for companies by allowing staff to monetise their shares.
It should draw in new investors too, Thorne said. "It’s an opportunity for the buyside, as getting the opportunity to invest in these private companies early and capturing more of the real growth is difficult, especially as listings get pushed back further. It’s an opportunity for a broader scope of people to get access."
Staying at home
The UK government is trying to encourage startup firms to scale up while staying at home – as are other European governments. There has been criticism that bigger, deeper and more welcoming US markets are better at financing private companies and getting them to list on US markets.
Private companies typically have limited options: trade sales; selling stakes to VC or PE funds or other investors; or an IPO. Each of those options can be complex, costly and lumpy. And the IPO market in Europe is having a tough time, with many new listings performing badly, potentially deterring owners from that route.
At the same time, the private debt market has boomed in the last decade, as asset managers and banks have built private capital operations to meet the need for bigger and more sophisticated funding options.
The most similar platform to the ITV currently in operation is Nasdaq Private Market, which targets private companies in the US. NPM offers auctions for secondary trading of unlisted shares, and other options such as tender offers or block trades.
NPM was set up in 2013 and spun out from Nasdaq in 2021. Its investors include Goldman Sachs, Citigroup and Morgan Stanley. It said it has 625 companies on its platforms, 160,000 participants and has handled transactions of more than US$43bn.
Turbocharge
Hajdukovic said LSEG would work with brokers and banks and the ITV isn’t competing with them. “This is not replacing that [private capital], it is complementing it. It will allow [private capital teams] to turbocharge what they are doing,” he said.
LSEG is in talks with stakeholders to resolve issues, including technical and regulatory matters like how much disclosure companies on the platform will need to make. Companies will not need to issue prospectuses, which can be time-consuming and costly, but they may be required to publish limited financial information about three days ahead of an auction window.
Skrine said greater disclosure and transparency requirements for private companies could help give confidence to new investors. “If their trajectory is ultimately to list, then it could be a good thing that the ITV starts introducing private companies to some of the governance and reporting frameworks that they will ultimately have to get to as a PLC," he said.
The ITV will target institutional and professional investors, rather than retail, but some high-net- worth individuals or discretionary wealth managers could participate through an auction agent. Firms such as Winterflood are expected to become registered auction agents to facilitate access to the platform.
Unicorn hunt
LSEG declined to comment on the companies it has talked to about being among the early users of the ITV. It is expected to target "unicorns" – or private companies valued at more than US$1bn – such as payments firms Revolut or SumUp, or drinks outfit BrewDog. They are among 51 unicorns in the UK, according to private company analysis firm CB Insights. But LSEG is also expected to target smaller, fast-growing companies, which could include the likes of sportswear firm Castore or metals recycling firm Atlas Commodities.
The sweet spot for NPM is companies valued at US$1bn–$5bn, which account for 44% of its clients. NPM said 9% of its companies are valued at more than US$5bn, 25% are US$500m–$1bn and 21% at less than US$500m.
Hajdukovic said the aim of the platform was not necessarily to get companies to list on the London market. “[Some] private companies want to stay private and this is not a feeder for the public markets. There is no incentive or disincentive for companies to list,” he said.