Unlocking the unlisted
We have seen over the last 15 years the number and size of private companies in the UK has grown explosively which is set to continue for many years to come.
Increasingly investors in unquoted companies are looking to trade in and out of their investment portfolios more freely and frequently in what is mostly an illiquid market. Private secondary market transactions have been eagerly sought after in recent past as investors looked to free up capital they have had locked up in previous deals.
Companies in their growth and transition phases have had, since inception, employee-based equity plans rewarding employees with stock to reduce the cash burn, which has left many employees sitting on significant share holdings, but with no mechanism for monetisation.
J P Jenkins, the oldest established share trading platform for private companies is building a Second Market ecosystem to at long last provide liquidity solutions for locked in private shareholders. This in response to an industry wide need for monetizing unquoted shares. Think Private Stock Exchange!
Since the EIS scheme was established more than a decade ago, over 26,000 companies have received £16bn of funds. VCTS have seen £7bn and P2P £100bn in small business loans. And there is still over £60bn in cash ISA’s. Moreover, in the UK there is a capital pool of circa £300bn in private companies in which management and employees’ own shares.
The Treasury has now commissioned a report to improve “shareholder capitalism” and investment clubs are burgeoning again reminiscent of the Governments “Wider Share Ownership” initiative in the 80’s since when the proportion of UK shares owned by UK investors has fallen from 11mil to 8 mil – a fall from 20.6% in 1989 to 12.3% now.
A number of brokers and institutions are increasing their focus on supporting this unquoted arena such as Finncap, Cenkos, Panmures, WH Ireland, Numis and Rothchild’s all having taken stakes in alternatives financing platforms and are actively sponsoring unquoted equity.
Some of the stats are worth noting.
According to the Federation of Small Businesses there are 5.5m firms in the SME sector, 99.3 % of total private businesses sporting a combined turnover £1.8 trillion and employing 15.7m people. Approx. 2/3rds of these SME’s are owned by ‘Baby Boomer’ age group and within the next 10 years the majority of this group have to change their ownership due to ill health or retirement. It is estimated that 4.4m millennials will inherit about £5.5 trill in the next 20 years.
According to the Employee Ownership Association there are also 200,000 fully owned employee only companies with a combined turnover of £35bn.
Yet in spite of this growth there is still not a viable exit strategy for owners, family members and employees.
Private markets are currently fragmented and disjointed which leads to limited and difficult to find liquidity. The end result is that the needs of both investors and unlisted companies remain largely unmet. Investors have difficulty accessing these opportunities and smaller private companies cannot always raise the funds necessary to fuel growth.
Since the demise of the USM and Plus Markets there has been no central credible liquid secondary market for investors and shareholders in Private Companies which are being formed at a rate not before experienced.
Investors in early stage companies are more / exclusively focused on short term tax benefits than on Capital Growth or exit. Advisors who bring opportunities (EIS, SEIS, Crowdfunders etc.) do not provide an exit and only focus on capital raising.
EIS and SEIS are the only Government sponsored initiatives aimed at developing SME’s and investments in them. Although they have been successful in creating investment in the sector, as have crowdfunders, many investors are starting to feel locked in with no effective exit mechanism.
Against this background the need for a secondary market is abundantly clear and unsurprisingly Angel organisations, VC’s and EIS Agents are extremely keen to see a suitable medium develop.
Second Market in partnership with J P Jenkins is the go-to company that operates a platform for dealing in private company shares by matching sellers with new buyers. J P Jenkins was established in 1991 and in conjunction with the newly created Second Market is in a throws of expansion to fill the gap in this huge private marketplace.
The J P Jenkins platform has 30 companies trading and Second Market have signed collaboration agreements with 30 organisations and growing rapidly that have links with private industry from which to generate liquidity solutions for locked in shareholders.
For further information contact Veronika Oswald at [email protected].