Private exchanges join forces as offerings drop

With Sarbanes-Oxley compliance pushing up the costs of going public, common wisdom last year among investment banks was that more companies and their backers would pursue private securities transactions to raise money. Lately, that hasn’t been the case.

Nasdaq’s private exchange for institutional investors has posted sluggish performance this year, reflecting the broader slowdown in the public market for new offerings.

But exchange and investment bank officials—who are close to finalizing plans for an upgraded trading platform—are counting on a turnaround in demand for unregistered securities.

This quarter, executives of Nasdaq and 11 of the largest banks will “wrap up the definitive alliance” for a joint facility to handle offering, trading, tracking and settling sales of unregistered equity securities, says John Jacobs, chief marketing officer for Nasdaq OMX Group Inc.

The venture, called Portal Alliance, combines the components of three private exchanges: The Nasdaq Portal Market, GS TRuE (short for Goldman Sachs Tradable Unregistered Equity) and OPUS-5 (Open Platform for Unregistered Securities), which was launched in August by Citigroup Inc., Lehman Brothers, Merrill Lynch, Morgan Stanley and The Bank of New York Mellon.

The Nasdaq Portal Market, the only one of the three with a sizeable volume of offerings, was built to provide a trading platform for 144A securities. These are named after a Securities and Exchange Commission rule adopted in 1990 that allows the sale of unregistered securities to qualified institutional buyers. Qualified buyers must have at least $100 million of assets under management.

“The market has drastically dried up,” says Jacobs, regarding demand for unregistered securities. “It’s probably running at a quarter to a third of last year’s run rate.”

In 2007, there were 101 commmon stock, American Depositary Receipt (ADR) and Global Depositary Receipt (GDR) offerings on the Nasdaq Portal Market. In the first quarter of this year, there were just five ADR and GDR offerings, and no common stock offerings.

Foreign companies continue to account for the vast majority of 144A offerings, says Jacobs. He notes that many come from companies that want access to U.S. capital markets but aren’t ready to build a retail following.

“Not every company is going to have an investor base that includes retail investors,” Jacobs says. “Some companies do have a complicated story and in their view may best be owned by an institutional investor which is more sophisticated.”

The Nasdaq portal for equities launched in August, and includes more than 150 qualified institutional buyers, Jacobs says. Typical offering size, he estimates, is about $200 million.

GsTrue, made its debut in May with an $880 million sale of a stake in investment manager Oaktree Capital Management.

In March, the SEC approved a rule change that will permit the portal system to include equity securities that use alternative settlement processes. Backers called the decision a key step toward finalizing the rollout of Portal Alliance. —Joanna Glasner