Cees Vermaas, CEO at The International Stock Exchange (TISE), explains how public markets are underserving many companies but that the growing private company economy needs an efficient and cost-effective solution for share trading. Enter TISE Private Markets.

I have more than 25 years’ experience in capital markets and so I am very much in tune with how they are serving market participants. Today, we can see that the current public market structure, including high frequency trading, is well organised for the largest and most liquid stocks but it fails to adequately serve the majority of others, particularly small and mid-caps. The result is a decline in the relevance of the public markets for all but the largest companies.

Declining public markets

Last year, in both the UK and across Europe, public markets and Initial Public Offerings (IPOs) saw a further dramatic decline. The number of IPOs was down, the money raised on those IPOs was down and many of the flagship IPOs that took place performed poorly post-listing. Several high profile companies, such as Arm and Birkenstock, swerved European stock exchanges and instead chose to access the deeper pools of capital available in the US, while several planned IPOs were pulled or didn’t come to fruition in the UK.

The trend towards private markets is clear, UK companies are choosing to stay private for longer.

Added to this, there continues to be an acceleration in the rate of delistings from public markets, with several public-to-private deals, the latest high-profile example in the pipeline being Hargreaves Lansdown. Low valuations make the UK an attractive hunting ground for acquirors, and private firms are taking advantage of lacklustre valuations and the flow of money away from London’s public markets. The number of quoted companies has reduced by 271 over the last 10 years and those remaining 1,260 include nearly 500 companies on AIM or Acquis, many of which suffer from low liquidity and high listing costs. 

"Public markets are not adequately serving a huge cohort of the British economy."

Public markets are not adequately serving a huge cohort of the British economy. A public listing is expensive, it can cost up to anywhere from £200k to £1 million when all costs have been factored in, even on a junior market, and besides, it raises operational costs such as recurring listing fees, broker fees and fees for auditors. For valuation and trading, most exchanges are exploiting broker models, but these fail to enhance liquidity for small and medium sized enterprises (SMEs). All in all, these companies are finding that the much-promised upside of liquidity is not only in short supply, but any benefit is hugely outweighed by the downside of the regulatory burden and cost of being listed.  

The UK Government, the Financial Conduct Authority (FCA), industry bodies such as the Quoted Companies Alliance (QCA) and various other market participants have moved to revise the UK listing regime. The intention is to reduce barriers and simplify the listing process so that these trends can be reversed. These efforts are laudable but increasingly it feels like trying to fit a square peg in a round hole and you have to ask, would it not be better to ensure that they are properly served as private companies?

A private company economy

Private companies are the lifeblood of the British economy. Of a UK workforce of 33 million, 27.5 million are employed by private companies. The UK has 19,150 privately owned companies with over 100 employees, which is 15 times the size of the quoted sector and over the last 10 years the number of UK private companies with 100 employees has grown by 3,096. They provide the bulk of goods and services we all use, create most of the employment, and generate tax revenues and export overseas. Simply put, the UK is a private company economy.

However, as private companies grow and build more value, their ability to access capital is still hindered by the cumbersome, almost Dickensian, processes that come with buying and selling shares in private companies. The way that shareholders in private companies buy and sell their shares today is inefficient, time consuming and costly – both for the shareholder and for the company itself. It’s unreliable, drawn out, expensive and uncertain. Essentially it hasn’t changed since the 1920s.

Typically, a private company shareholder would need to initiate contact with the company, which is then tasked with identifying potential buyers or sellers of the shares. Then a price must be agreed before the transaction can be completed. Even then, there is the time it takes to settle the transaction i.e. the time it takes for the buyer receive the shares and the seller to receive the funds. This can take not only weeks but most likely, months, adding complexity and hindrance to a transaction that could otherwise be swift and efficient. And it frequently goes wrong, leading to disputes.

Private company share trading

The UK Government has acknowledged these challenges across both public and private markets and consulted on the introduction of the Private Intermittent Securities and Capital Exchange System (PISCES) as a mechanism for shares in private businesses to be traded in periodic auctions. Under the proposals, the FCA would grant licenses to the likes of the London Stock Exchange Group to operate a PISCES platform that would, in effect, allow a company to go public temporarily while providing access to a wider pool of investors before reverting to its private status.

There has been a somewhat cool reception to PISCES from industry associations who have concluded that uncertainty about demand and practical costs need to be resolved before the concept can be realised. We await the results of the consultation but for the moment, nothing has launched and from what we know, PISCES will bring with it many of the obligations of being a publicly listed company, such as the overly onerous and costly disclosure and reporting requirements, as well as the involvement of brokers and other intermediaries who charge fees and commissions for their services.

"What’s clear is that private markets need a solution for liquidity to achieve the desired recycling of money into new investments."

There are other existing options for trading shares in private companies, such as Asset Match and JP Jenkins. The popularity of secondary market transactions is increasing year on year, with volumes rising from $3.2 million in 2017 to $20.4m in 2021, according to Nasdaq. Yet, the existing service providers charge fees on the amount of activity conducted through the platform and are reliant on public market infrastructure providers, such as brokers, who also take a cut from the transactions which they facilitate.

What’s clear is that private markets need a solution for liquidity to achieve the desired recycling of money into new investments. How about… a secondary market for private companies and investors to access liquidity events without the volatility of listing on the main markets? Somewhere early shareholders and venture capital and private equity funds can find exit opportunities? Where new institutional investors can gain access to companies they might not be able to otherwise? Where employees can access liquidity in their shares? Where investors can recycle their capital having the certainty of periodic liquidity events?

Introducing TISE Private Markets

TISE is an established operator of public markets, and we are best known as a leading European bond market but last year we diversified with the launch of a private markets offering, TISE Private Markets. We’d spent two years speaking to private companies and other interested parties to develop and refine our proposition in the private markets. Private companies told us that they wanted a system that is simple and convenient but not like trading public company shares with brokers, expense and a lack of control over who owns the shares.

"TISE Private Markets enables private companies and their shareholders to have the benefits of a more efficient mechanism for share trading..."

That’s why we launched TISE Private Markets, which is the first platform of its kind for UK private companies. TISE Private Markets is a fully disintermediated platform providing unlisted companies with a dedicated marketplace through which they can directly access an integrated set of tailored electronic solutions, including trading, settlement and registry management. Companies which join have full control of their dedicated market, from onboarding shareholders to scheduling auction events and managing registers. There is access to a bespoke auction model which concentrates liquidity, a tailored auction algorithm to protect pre-emption rights, seamless electronic settlement of cash and shares, and online tools for the convenient management of share transfers and shareholder records.

TISE Private Markets enables private companies and their shareholders to have the benefits of a more efficient mechanism for share trading without the cost, administrative burden and loss of control associated with being publicly listed. It gives private companies control over their shareholder register and facilitates the process of shareholders buying or selling their shares without additional charges, transaction fees or other commissions levied by brokers. This offering also assists these companies in their growth via a platform that not only allows for a better way of share trading but also increased efficiency in the management of the shareholder base and the wider administration of the business.

Case Study – Blue Diamond Limited

The first company to join TISE Private Markets was Blue Diamond Limited, which is one of the largest garden centre groups in the UK and the Channel Islands. With more than 4,000 employees, annual revenues approaching £350 million and more than 420 private shareholders, the company is a well-known Channel Islands success story and therefore has the profile to join a public market, so it is a real coup that it chose to become the first company to join TISE Private Markets.

Blue Diamond turned to us because share register management was manual and time consuming and the mechanism for share trading was inefficient, with a lack of transparency for buyers and sellers inhibiting the liquidity of the stock and the value of the business was not reflected in the share price. They feared a loss of control over the shareholder base and higher costs if they were to be publicly listed. We are delighted to have been able to service Blue Diamond and extremely pleased with the excellent feedback from management and shareholders on the benefits of using TISE Private Markets.

Whilst servicing Blue Diamond, we have developed a pipeline of other prospective clients in the Channel Islands, UK and beyond. Our new service is highly attractive to companies which are privately owned, including those held by private equity groups or Family Offices, those currently quoted on public markets but seeking to return to a private ownership model, as well as those companies operating employee shares schemes, groups delivering tokenised asset solutions and fund management groups seeking to provide liquidity events to investors in their products.

Outlook

I am seeing the public markets declining in relevance for all but the largest companies and at the same time, the growth and expansion of the private markets. Private companies have historically struggled to find an efficient mechanism for share trading and while there are some existing secondary market liquidity platforms, and others in development, these rely on traditional public market infrastructure providers, such as brokers and other intermediaries, who levy charges based on transactional activity. We’ve introduced TISE Private Markets as a fully disintermediated proposition which provides private companies and other managers of private assets with their own stock exchange in a box. In this environment they can efficiently and effectively manage their share registers and host liquidity events for existing shareholders and to which they can invite potential new shareholders.

In a private company economy, this is the future.

This article was originally published in World Commerce Review, September 2024