Private Secondary Market - The Other Side

The biggest criticism that mars Private Secondary Market is that all the activities, all the transactions happen under immense Information Asymmetry and hence these are inefficient markets. The trading takes place in a somewhat opaque market accessible to only a relatively privileged class of investors. The market makers do try to provide as much information as they have access to and are permitted to but at the end of the day what they are doing is simply increasing the velocity of transactions made under poor judgment. So there is a question mark on the reliability on the valuation in these markets:

• Efficient Market Hypothesis says that market prices fully reflect all the available information. Can we say that in secondary marketplace, there is a high level of information asymmetry and hence the stock prices in this market do not reflect a fair value? 
• The volume of transactions in these markets is too small compared the same in a public listing and any valuations derived out of these small number of transactions can be misleading.

Many private companies attract new talent by giving the equities as one of the incentives but restrain their employees to trade in the private marketplace. This makes sense as the employees will have far more knowledge of the company performance and can lead to insider trading. There is no clarity on whether insider information is allowed in the trading of private stocks. But these markets in a way encourage the employees to leave the company as the share restrictions are not binding once the employee is no more in company’s payroll and they can cash out while the company is still growing. Certain companies like Zynga try to tackle this issue by having designated trading windows during which its employees can sell their stocks. But even when employees or founders are allowed to offload their stocks, a lower equity stake might result in a lower effort from them towards the company’s success.

With the rise of these marketplaces for raising capital, the private companies are remaining private for a longer period. Most of the current players like SecondMarket and SharesPost also act as placement agent providing advisory services to the investors. These markets are slowly becoming a strong viable alternative to public offering and hence are proving to be one of the many factors for a steady decline in the number of IPOs listed in U.S. The result is that NYSE Euronext is now ready for a foreign acquisition with NASDAQ OMX group trying to avert it by offering to take over the NYSE.

The market is too young and vibrant to blame on the pertinent gaps. There is little doubt that they are indeed helping in capital generation for early growth start-ups and generating liquidity for illiquid assets. They need to ensure that more data, analytics and research reports are accessible to the market participants to introduce more transparency, increase the number of transactions and improve the fair value of these transactions. One question remains as to how average investors can be part of successful start-ups growth story before these companies go through a public exit or become too matured to have similar growths?

Private Secondary Market - The Utility

Private Secondary Market has been gaining prominence due to the eye-popping valuations of a number of social media companies in such markets where accredited investors (requirement by SEC for exempted transactions as defined under Regulation D of the Securities Act of 1933 to ensure that the participants are sophisticated with ability to bear the economic loss in case any in the investments made and they abide by the resale restrictions as placed by the company whose stock is being traded) generally trade on private companies. This Marketplace allows privately negotiated sales transactions to trade illiquid, restricted securities and facilitate alternative investments like private company stock, collateralized debt obligations, bankruptcy claims and auction rate securities. The investors are promoted to capture the illiquid premium and hold on their stakes for longer period knowing that their assets are not largely co-related with the public market. Eminent players providing such platforms are: Gate Technologies, SecondMarket, Xpert Financial and SharesPost. Through these markets, the small cap early stage start-ups are now getting access to funds without getting involved into the arduous legal process and costly financial disclosure required under the Sarbanes-Oxley Act. Since the trading occurs without any declared financial information of the traded stock, this marketplace attracts investors with a higher risk tolerance such as an archetypal startup investor. LinkedIn is one of the first social media companies to have come out of the secondary marketplace and graduate to full-fledged IPO stardom.

With the advent of this marketplace, investors no longer need to wait for a company’s public listing and private companies get the option to create their own customized liquidity program. The platform currently does not support shorting, margin, derivatives or manipulation and hence seems to be more untarnished. Investors here are actually more interested in flourishing the emerging private companies and make them capable of generating optimal investment returns. With the likelihood of a higher valuation, an increase in brand awareness and a greater ability to attract additional capital, there has been a surge in the number of U.S. based companies participating in the secondary marketplace. 

As per SEC rule, if a private company exceeds 500 shareholders, then it has to register all its equity securities with SEC and start disclosing its financials which is what Facebook might have to follow soon as it has passed this limit. But recently, a new legislation to revise the 1964 Securities Acts Amendments has been introduced which include raising the private company’s shareholder’s count from 500 to 1000 and exempting accredited investors and company employees from this count. Such a change will certainly give a thumbs-up to the marketplace for private shares by enlarging the potential investors’ pool in a company. This will tempt companies to remain private a bit longer using the liquidity derived from the secondary marketplace and enable them to emerge stronger for an eventual public exit. Thus instead of prematurely going public and risking their stocks in the hands of shorters , traders and manipulators, the companies can more effectively control their liquidity and shareholder base using this marketplace.

Actual Independence - Part I

No one noticed it in the school except his poor uneducated house servant who took him there for the Independence Day celebrations. There was a mistake in the order of tricolors in the Indian Flag hoisted - 'Hara neeche hona chaiye' - His servant pointed to the school staffs. It was soon corrected. That was the first Independence day he could remember. He felt it then.

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He don't remember what class he was studying in - perhaps the first standard, from his house being one of the tallest building in the town (courtesy the big joint family he was part of), he could easily see the fire near the railway station. Majority of the shops there belonged to Muslims. Then he heard that his uncle's best friend's(a Hindu) shop also got burnt in that fire. The next day early morning he got ready for school. But his uncle announced no child in the house will go to school that day. No one from the house went for work. The unannounced holiday had started.Since all the males were at home, special food was cooked. But perhaps no one ate. They were busy in terrace collecting whatever they can - hundreds of bricks , chilli powder , cemented slabs, preparing for onslaught if any. People lined in their terrace seeing the loots made across the road. The Hindus broke the locks of all the tailors' shops nearby , just because they were Muslims and burnt the clothes they were working on , not thinking twice that those same clothes actually belonged to mostly Hindus.

From the same terrace , he looked down and recognized the rickshawalah who used to daily take him to school along with other children of the locality. The rickshawalah was visiting each house and taking orders for bomb perhaps and was much sought after mainly for the self-protection as there were rumours floating around that Muslims are forming groups and attacking the hindus areas.Suddenly, there was a loud sound, he could see the firings around the nearby Gurudwara. The house doors were closed and everyone was at terrace, ready to attack from above. At that instant, a loud noise came from back - 'Ya Ali'. Everyone turned back in horror. One of his uncles brought a loudspeaker from behind and played a prank which ofcourse no one liked. But later it became fun - there was a bit of competition amongst the children of all the households in the locality regarding which house can shout the slogans most loudly. And the sky was filled with lines like 'Jai Shri Ram' , 'Har har Mahadev' and 'Jai Maa Kali , Tetarpur(one of the popular muslim areas in the town) Khali'. One of his cousins shouted - 'Yaa Ali, tod dushman ki nali' but was immediately reprimanded by the elders in the house. Not much changed in next few days. The schools remained closed. Curfews were put. The independence was lost and shamed.

One day,  he could see one aeroplane flying and people waving their hands to it - it was the Prime Minister Mr.Rajiv Gandhi visiting the place.Whenever curfew was relaxed, there used to be festive kind of environment, people lining up to stock their daily necessities.The mornings started with newspaper discussions in the space just outside the house with big guns from the locality participating in the discussions. And if there was any siren type sound coming, they used to scatter immediately perhaps fearing of the shoot at sight orders during the curfew. All lights and televisions used to be off during the night so that Muslim attackers,  if they come think,  that no one lives in the house.The female members were not allowed to pick any telephone calls. It was decided after receiving a couple of 'Please save us, they are killing everyone, please send the police' calls - desperate attempts from people who just happened to pick any number from the telephone directory for help during their time of trouble. It was common to hear of dead bodies being found in wells.

One morning newspaper headlines were widely discussed. He got curious and the first news item he ever remember reading was  -  Lalu Yadav had got Advani arrested and brought his rath yatra to a halt. Soon Diwali came but it wasn't celebrated because crackers were perhaps banned. Schools remained closed and promotions to next class were made on the basis of half yearly exams' results. Once the things got normal , one particular day was celebrated as the Diwali day in the locality. His family tailor , a Muslim, again stitched his new clothes. He felt independent again.

Is Efficient Market Hypothesis Valid?

Do markets actually self-correct themselves? Agreed that when the prices don't reflect the best available public and private information , those having the best available information take advantage(basically transacts or trades) of it until that advantage is gone (which is when the same information is available to everyone - efficient market). Should we invest in an efficient market at all? Or better try to get hold of that golden asymmetry? Which is why we depend on financial intermediaries , those brokers , bankers and fund managers, because they have better 'insights'. Don't the technical and fundamental analysis give that extra edge of information?

So, doesn't the information asymmetry drive the financial markets? One argument can be that it is the individual's expectation which drive the financial market - X expects the prices to rise and hence a buy while Y expects the prices to fall and hence sell to X. But don't these contrasting expectations get built by the same asymmetry of information?

Those brokers , bankers and fund managers do have better insights and we are in a way right to delegate our investment decisions to these experts. But this delegation somehow creates a sort of agency problem. They become our agents and obviously have better information than us finally leading the moral dilemma. So the bottom line is - it is the information asymmetry which drives the financial markets and time to time put these same markets into trouble?

Don't the point made by efficient market hypothesis (EMH) that price of any traded asset reflects all known information about the asset , puts us in an illusion that "all is well"? And that regulators are indeed wrong to close their eyes and not interfere in the markets? EMH is in a way contributing to the development of a financial crisis by holding the regulators from raising the red flag.

The Wall Street Casino

Are the banks in U.S still not "too big to fail"? Ask anyone on the Wall Street and none will accept the bubble in making. They keep on showing there is enough of money chasing investment opportunities particularly those risky ones but no money for job creation in this land of opportunities . Groupon's first mover advantage wont last long but still valued in excess of $25 Billion. Very soon their stock certificates out of the impending IPO will be used as wallpaper in the purchaser's drawing room. Its now a decade since S&P has been delivering zero returns. US is bankrupt but rejoicing at the gay legalization.

From manufacturing to finance to speculation - Welcome to the new world order where few make money like bandits and every market crash is followed by latest rounds of head-scratching and pleas for reforms to start it all over again. Finding new ways to legally and directly or indirectly steal money from the public - is that what they are supposed to do in their cushy suits? A silicon valley techie thinks out of the box and transcend the old ways of doing the same things while a Wall Street wizard also thinks out of the box understanding that playing within the old rules of uncertain profits and slowly accruing returns will no more quench their ever carving thirst. And came the move from the stocks , valuations and investments to the psyche , fear of losing out,  herd mentality, salesmanship, flaws within the old rules and greed disrupting ethical standards and exploiting the loopholes. 

A hacker finds flaws in people's security systems to get privileged control while these guys at Wall Street find flaws in public nerve to mint their excesses. In both the cases, the revelations can be embarrassing to those exploited and hence almost gets unreported and untraced even though sharing the exploit would be helpful for various others to avoid the same in the future.

From the great depression to the great recession and still going strong. The casino is on , sanctioned by the government and funded by the poor taxpayers. More like a legalized mafia , very much like Las Vegas.  When will it stop?

Getting out of Facebook Fatigue

We have a saying in India - "Nayi nayi Dulhan sabhi ko achi lagti he" (Everyone like the new bride). Can the same be said about Facebook now when the number of FB users in U.S has gone down for second straight months? No doubt that Facebook brought us closer to our friends , made the web world a small place to hang around but also brought the need of managing our online image and hence the need to self-censor. Plus those frequent irritating updates on your newsfeed from one or two individuals in your list making you think if you really want to know about all their activities until you want to sleep with them.

There is no doubt that facebook growth at some point of time will moderate given the fact that it depends on the internet penetration of any given country. The law of diminishing factor will start playing its part. So it should not lose sleep over the stagnating number of users but rather focus on how much average time its users are spending on Facebook, how much it can engage its users. If this user time is decreasing or stagnating , then it should certainly be wake up call as it will directly impact its advertising revenue. It is still a smaller player than Google as far as the ads revenue are concerned but certain to go through the adoption curve which perhaps would tilt the revenue share the other way.

At times, people get confused and start valuing a web company on the basis of the extent to which it engage its users.For example , Angry Bird - the game is inherently very engaging and the player gets so immersed in it that he/she gives little notice to the ads ; so it still proves to be a bad business. Now take Google, they increased the value of their Adwords by creating several non-immersive pages around google.com that makes us sitting on its sites for far more time than say when Google started. The adwords remained the same , the ads quality is more or less the same, even the way they try to get noticed is same but still we are seeing more of them with more opportunities to click on them. And then they introduced the win-win adsense and started syndicating the ads to billions and now with Android , they have captured the mobiles space. 

So here is the lesson for Facebook - Invent multitude of products and features as done by Google. But they have not done it yet. Facebook.com needs be more than a place where we can share some updates, chat a bit, tag friends, upload some photos, and do a bit of gaming - not one where we come only to refresh ourselves , sort of entertain ourselves unlike Google where we go for our needs - searching , gmailing , sharing docs et all.

Grade Inflation : Life Beyond 100%?

We met this U.S lady during our recent Sri Lanka trip. She had been travelling around many countries including the likes of India, Indonesia, Thailand et all since last 7 months or so. Believe me she was not on any vacation sort of. She left her 2 years old coshy job in Hollywood and then an offer from Versace to chase the things she is passionate about. She don't pay for her flight tickets but rather manage it from the airmiles she gained during her sales stint on her job.Touring around these countries was as she said her way of 'educating herself'. She stayed in India for around two and half months , got trained in Yoga(a certified one) and want to become a part-time Yoga trainer. Her ultimate aim is to work in yachts and become an 'international resource'. And her talks reflected the amount of knowledge she has gained of the countries she has visited. I never heard of Delhi Belly until Aamir Khan picked this 2 words for his upcoming movie but she knew it well with her dose of you tube clips.

Can we Indians afford to do the same? Even when we have world's all wealth? A break from the work and/or studies? Remember those application forms from your dream company asking for any gap in studies/jobs? And if it exceeds 6 months except when you have dropped preparing for IITs, you will end up being a non-serious candidate. You lose the edge over one having a 'continuity' with no gaps. The recruiter (read the society) wants you to be occupied - even when the job you are doing sucks you and kills you every moment, even when that engineering and doctorate degree makes your life more confused and more meaningless. Keep running else someone else will move ahead. Keep running else someone else will defeat you. 

This fear of losing has perhaps defeated our generation from core. Grades and percentages has become the hallmark of our existence in this society. Just pick anyone just anyone from any corner of the world , lock him/her in a room with those bundle of book to mug and he/she will finally vomit it in any exams - there is no rocket science in it, there is nothing great about it but still it is what count here - how fast , how good and how efficiently you can do it- this is the race we are entangled in. And still we are running and we will even after the 100% cutoff is here.But for what? We don't know. Perhaps to make your nearby uncles and aunties happy, perhaps to keep their mouth shut.

Why do we need to listen them? Why can't we have a life beyond grades? Why can't we educate ourselves the way we want? Why can't we learn the things we are passionate about?