Investors in private companies are typically betting that one day the company will grow large enough to float on the public stock exchange, providing early backers with a bumper payday.
But companies now are remaining private for longer, thus delaying opportunities for investors to cash in. This is partly because money is being allocated to private-market investments. But also, going public comes with additional expense and regulatory scrutiny, which may disincentivise growth-stage companies.
“The public market in the UK is not hospitable to growth companies,” says Victor Basta, managing partner at Artis Partners. “For growth companies, an IPO is not a viable exit route.”
Market participants note that the UK supports early-stage funding through schemes such as the Enterprise Management Incentive, there is a potential missing link that follows seed funding, venture capital and private equity before companies decide to go public. This funding gap means investors’ cash may be tied up for much longer than they had anticipated, which could impact the availability of capital for new businesses.
What is the PISCES framework?
For this reason, the UK government has introduced the Private Intermittent Securities and Capital Exchange System (PISCES) framework, which will enable investors to trade shares in private businesses more easily – albeit with certain restrictions.
Shares will only be tradable during set auction windows, for example, giving companies more control over when their shares can be traded and who can trade them. Individual market operators that run a PISCES venue can also set eligibility criteria for companies to use their trading venues.
The London Stock Exchange (LSE) hopes to become a PISCES market operator with the launch of its private securities market later this year, pending approval by the UK’s financial regulator.
There’s no point in these companies doing this whole exercise if significant shareholders are raising a relative pittance
While there are other markets globally that allow private shares to be traded, Tom Simmons, director of private markets development at the LSE, says PISCES is being billed as a world-first because it combines a dedicated regulatory framework for trading private companies with the ability to use public-market infrastructure for the auction process – something no other markets offer.
Therefore, PISCES could be a stepping stone for growing companies that may wish to go public in the future.
“It’s a quasi-public trading platform that’s regulated with a common set of standards, rules and disclosures. It enables companies to diversify their shareholder base to prepare for life as a public company and provides alternative means for liquidity creation in a slightly more organised, regulated fashion,” explains Dan Hirschovits, a partner in securities and capital markets at Paul Hastings, a law firm.
By creating periodic liquidity windows for private investors to exit their positions, PISCES can help recycle capital back into new businesses, says Jon Prescott, a partner at Praetura Investments, a venture capital firm.
While the PISCES framework provides regulatory certainty, the compliance process is significantly less intensive than for public-market trading.
“A very large company listing on either the alternative investment market or the main market would typically pay a minimum of £500,000 a year just in additional compliance and reporting costs,” says Myles Milston, CEO and founder at Globacap, a tech platform facilitating private-market investing. “That’s notwithstanding the additional pressures that come with being public and the ongoing communication with shareholders. The overhead associated with going public is turning many companies away from the public markets.”
Boosting capital access and investor confidence
Supporting growth-stage companies is beneficial for the UK economy, given that small and mid-size companies account for 60% of employment, according to UK parliamentary research.
“Making more capital available for private enterprises will help to fuel employment and innovation,” says Milston. “This is really a driver of economic growth and can help the UK become more competitive.”
Creating more selling opportunities for investors also reduces the risk profile of private-market investments, potentially encouraging more investors to participate in deals.
“There’s a big risk premium associated with private markets because it’s very difficult to exit those positions,” says Miston. “For an individual or even for a family office, holding something for 12 years is not always realistic, even if it seems like a good idea at the time. Access to secondary liquidity changes the risk profile for these types of investments.”
The supply side of these markets will be fuelled by investors looking to exit their positions, but the level of demand from institutional investors won’t be clear until the PISCES trading venues are operational.
“If I can only sell £1m to £3m of shares, it doesn’t really help me, but if I can sell £20m or £30m and actually get a secondary sale of some significance, that makes more sense,” says Basta. “There’s no point in these companies doing this whole exercise if significant shareholders are raising a relative pittance. It may achieve a certain amount of liquidity for employees, but will investors be willing to take bigger slugs? That’s up for debate.”
The overhead associated with going public is turning many companies away from the public markets
Such opportunities may appeal to cross-over investors who are reluctant to back an early-stage company but want better access to growth-stage companies before they go public, says Hirschovits.
“They’ve also designed the market so there’s no UK stamp duty applied on trading as there is in public markets, which is another incentive,” he says.
The level of investor interest will ultimately hinge on how many high-quality businesses decide to list on a PISCES exchange.
“We know there is a lot of dry powder out there, so if investors see PISCES as a way of deploying that capital, then there could be significant demand,” Prescott says. “It might take time, but it could become an important part of the capital markets ecosystem.”
Investors in private companies are typically betting that one day the company will grow large enough to float on the public stock exchange, providing early backers with a bumper payday.
But companies now are remaining private for longer, thus delaying opportunities for investors to cash in. This is partly because money is being allocated to private-market investments. But also, going public comes with additional expense and regulatory scrutiny, which may disincentivise growth-stage companies.
“The public market in the UK is not hospitable to growth companies,” says Victor Basta, managing partner at Artis Partners. “For growth companies, an IPO is not a viable exit route.”
