DealTalk: Private stock placements now rival IPOs : US Business

By Mark McSherry

NEW YORK (Reuters) - A fast-growing market for private placements of stock has emerged to rival the initial public offering as a way for U.S. companies to raise capital by selling shares.

Last year, the value of private placements of unregistered stock, or 144A transactions, reached $162 billion, outpacing the $154 billion raised in public offerings, according to Nasdaq Stock Market .

"For the first time that we have been able to tell, the 144A marketplace has become comparable to or even slightly larger than the U.S. traditional equity marketplace," said Nasdaq Executive Vice President John Jacobs.

This year too, the volume of private placements is running just ahead of IPOs, according to research firm Dealogic.

Private placements have become increasingly popular with companies that want to raise capital without many of the regulatory and disclosure requirements that come with a public listing.

For such companies, private placements -- which are restricted to qualified institutional buyers with at least $100 million of assets -- are often quicker, easier and less expensive than an IPO.

What's more, trading information platforms developed by FBR Capital Markets , Goldman Sachs Group , Nasdaq and others are set to make privately placed stock more liquid. That amounts to a wider marketplace in which to trade these unregistered securities.

"This is a way to still essentially have your securities trade primarily in the United States on the desk of a domestic broker-dealer but not have to comply, at least initially, with all the Sarbanes-Oxley requirements," said FBR Capital Markets Chief Operating Officer Rick Hendrix.

"It is a new market in the sense that more and more companies are availing themselves of this exemption from the registration requirements in the United States," added Hendrix, whose firm is also a prominent player in private placements.

HALFWAY HOUSE

In May, Goldman Sachs helped underwrite the private sale of 15 percent of hedge fund manager Oaktree Capital Management for $880 million.

As part of that sale, Oaktree told investors they would be able to trade the shares through the new Goldman Sachs Tradable Unregistered Equity system, or GSTRuE.

"We think (GSTRuE) has appeal to any entity or company or issuer that wants to remain private for their own reasons for the near term or the long term," a Goldman spokesman said.

Private equity firm Apollo Management LP also plans to list shares privately on the new Goldman Sachs exchange, The Wall Street Journal reported on Tuesday. Goldman and Apollo declined to comment on the report.

Nasdaq is waiting on regulatory approval for a portal that would allow institutional investors to monitor private stock placements.

Jacobs said many companies that tap the private placement market eventually want to go public, so the 144A transactions provide a convenient halfway house.

"Institutional investors get an opportunity to invest in companies (at an) earlier stage than being public," he said.

Nasdaq Chief Executive Robert Greifeld told a conference in May that the new system could be the most important development for the equity market since 1971, when Nasdaq was founded.

GOVERNANCE

Under SEC rules, companies can sell securities without registering them as long as issues are limited to qualified institutional buyers with at least $100 million of assets and there are no more than 499 stockholders.

Retail investors are not eligible to take part in private placements because the stocks are not registered, but mutual funds can invest on their behalf.

Hendrix of FBR Capital Markets said most types of institutions are keen to get a slice of the 144A action.

"We have got to the point now where I would say the investors that don't participate are the exception," Hendrix said. "The big mutual fund complexes participate in these transactions ... hedge funds participate ... (as do) private money managers."

On the corporate governance front, one expert said 144A transactions raised no eyebrows.

"How the stock is placed is not really of great concern," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.

"Frankly," he added, "the institutions are probably, from a governance standpoint, much more active overseers of management ... than retail investors."

(c) Reuters 2007. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.