NYSE Euronext (NYSE:NYX) announced on September 9 that it has picked up a minority stake in ACE. ACE provides a secure portal where investment banks and other placement agents can post information and market private transactions. Institutional investors and accredited investors can access this platform as a centralized venue for identifying and reviewing various private investments.
The announcement comes almost six months after a similar move made by its biggest competitor, NASDAQ OMX (NASDAQ:NDAQ). NASDAQ started a joint venture with Sharespost, which is an online platform for trading private and unlisted securities. (see NASDAQ And SharesPost’s Private Market Is A Good Idea But Has A Long Way To Go) Unlike Sharespost, ACE does not provide private placements transactions through the platform at this point and investors go to the banks or dealers directly.
We believe that the market for private placements in the U.S. is huge. Over time, it could provide a significant growth opportunity to both exchanges, which have been hampered by low equity trading volumes in the past few years. However, it may still be too early to get excited about this opportunity due to failed attempts at cracking this market in the past.
The Private Placement Market Is Potentially Huge
According to NYSE Euronext’s own estimates, around $1 trillion worth of private placements are made in the U.S. every year.  That is much larger than $43 billion that was raised in the U.S. IPO market in 2012. 
The segment also seems to be attractive if we look at existing examples of such markets around the globe. For instance, in Europe, the London stock Exchange has been operating a market called AIM since 1995. It provides capital raising opportunities to growth companies, many of which are early stage, venture capital backed. According to data provided by the company, this market currently hosts over 1,100 private companies with a total market capitalization of around £43 billion. 
And It Could Lift NYSE’s Existing Businesses
Currently NYSE earns around $450 million each year as listings fees from nearly 3,000 issuers listed on its various U.S. markets. We believe this figure could increase significantly over time if the company is able to do in the U.S. what the London Stock Exchange has done with AIM in Europe.
Further, we expect the exchange’s trading volumes will grow due to the new initiative. However, growth is likely to be very small because there are several regulatory restrictions on trading unlisted stocks, and retail investors are generally not allowed to participate in these transactions.
However, Caution Is Necessary
This opportunity has not come up overnight. In fact, it has existed in the U.S. for decades, and yet all the major exchanges have somehow failed to capitalize on it. The SEC passed rule 144A in 1990, allowing qualified institutional buyers (QIBs) to trade in securities of non-publicly held companies. NASDAQ even got approval for starting a market for such securities the same year, but finally did so only in 2007. Even then, its initiative did not get much traction and the platform, called PORTAL Alliance, was still looking to complete its first transaction in 2010.  NYSE too seems to have not exploited the private placement opportunity until now.
We believe that the reluctance shown by the exchanges and the difficulties faced by NASDAQ’s PORTAL Alliance are indications that the market is not as easy as it appears. It could take a while for this business and its market to contribute meaningfully to the value of the two exchanges. However over time, we believe that trading in private placements presents an interesting growth opportunity.Notes:
- NYSE Euronext Enters Strategic Partnership with ACE to Transform the Private Capital Markets, NYSE Euronext, September 9, 2013 [↩]
- 2012 US IPO watch, PWC, February 2013 [↩]
- List of All Securities (excluding debt) with FSA Category, AIM [↩]
- Slow start, great hope for Nasdaq private exchange, P&I Online, January 14, 2010 [↩]