Private electronic securities exchanges are on the rise as the financial services sector increases in sophistication everywhere. Already in the US, a number of exchanges are in existence for enabling private securities trading including Genesis Exchage, New York Private Placement Exchange, Entrex, Opus-5 and GS TRuE. These exchanges facilitate capital raising and the trade of private equity and debt positions for unlisted companies and funds. With the size and trade dynamic of Israel’s venture capital, venture funds and standard private equity market, I am surprised a private securities exchange isn’t already in place, which I think could be very successful, especially if opened to traders internationally. A single well established private equity and debt exchange would facilitate the influx of further capital into the country and also between local participants. This would likely lower Israel’s overall capital-risk due to increased liquidity both in private equity and private debt thus advancing Israel, or any other country instituting such an exchange.

In one scenario amongst many, a private equity exchange would enable corporations worldwide to monitor it knowing that the companies listed are available for a straightforward acquisition, with that exit path being a factor attracting companies to list on the exchange from the outset. In another scenario, VCs could find co-investors for a funding round using the exchange, yet also have more control in a company’s valuation as offered on the exchange - hence a premium valuation could be accorded to investors who would otherwise have little access to venture investing or else no access to any particular ‘hot’ investment opportunity. Additionally, by using the exchange when leading a round, VCs can be in a much better position to retain or obtain a board seat by diluting the uptake of shares to a multitude of investors. These are only a couple of scenarios that would not be possible without an unregulated (although rules could be instituted) private equity exchange in Israel or elsewhere.

I recently spoke to Neil Pennington, the BDM of M-co New Zealand, a company whose stated role is to “create highly user-friendly, dynamic modern marketplaces.” Their trading system was modelled off a multi-million dollar financial services system with M-co’s system so far having implementions in the sectors of energy (EnergyHedge), private equity (Unlisted) and emissions (Regi). Unlisted is described as follows:

An internet-based trading platform that allows small to medium sized companies to trade their shares in a simple and cost efficient way, and to gain greater exposure to potential investors. We undertake the day-to-day support of Unlisted and the trading platform utilises our M-co Trade system.

On the other hand, Regi is a commodities trading registry for carbon credits, and only one in an increasing number of exchanges worldwide that deal with carbon emissions.

Neil told me that starting a private equity exchange typically entails initially listing about 5-6 companies/funds/issuers with the number then possibly increasing due to further participation from network effects. Additionally, exchanges can be made exclusive to certain participants, share issuers and traders. It can cost around US$40,000 to launch an implementation of M-co’s system with the price increasing according to growth. M-co has had experience working in the New Zealand, Australia and Asia-Pacific regions.