Earlier this month the UK government launched a consultation on a new platform that would allow private companies to trade their securities in a controlled environment and on an intermittent basis.
The Private Intermittent Securities and Capital Exchange System or PISCES combines elements from public and private markets and is designed to support companies scaling up by providing liquidity, helping shareholders – including employee shareholders – realise gains, and providing an opportunity for companies to rationalise their shareholder base.
The expectation is that investors will gain better access to companies while also benefiting from greater transparency and efficiency.
Given the number of private companies that have multiple shareholders and a complex shareholder base who often have different expectations around valuation, hold periods and exit intentions, Simon Olsen, Partner Equity Capital Markets at Deloitte reckons the proposed system would enable such companies to access adequate liquidity for their shareholders in a manner that is relatively straightforward and cost effective.
“It should also provide a good opportunity for companies with a concentrated shareholder base, for example those that are majority founder or sole investor held, to achieve a partial liquidity event with a platform for further liquidity events in the future,” he says.
PISCES would enable private companies to access the funding and liquidity they need while avoiding the complexity and expense of going public and if deployed in the right way could be a real catalyst for the UK’s private markets ecosystem suggests Myles Milston, Co-founder and CEO of capital markets tech firm Globacap.
“PISCES venues will enable more firms to stay private for longer by providing private markets investors a standardised route to exit, reducing their investment risk and enabling them to deploy even more capital into new private investments,” he says. “Rather than preparing firms for a future listing, private market trading platforms will provide better alternatives to public venues such as AIM which struggle to provide deep and continuous liquidity.”
The UK has a better-defined funding ladder than it used to thanks to angel investing networks and venture capitalists, even if the pools of capital are not as deep as they are in the US.
“PISCES needs to work with these existing sources of funds, as well as established intermediaries and facilitators such as brokers and investment banks who can also provide a channel to investors,” says Russ Mould, Investment Director AJ Bell, who refers to a number of risk factors.
“Wilfully steering funds and investment institutions toward illiquid investments looks like a bit of a U-turn and increases investment risk due to both liquidity issues and how interest rates – and thus discount rates – are higher now, which could impact the valuation of younger firms.”
Another issue is how the provision of an avenue to sell could encourage selling. PISCES must not become a means for sellers to cash out at the first possible opportunity.
Even with the introduction of PISCES, the UK is still playing catch-up to the US where the alternative trading system framework has seen some real growth and success over the past couple of decades, leading to deep and liquid private markets.
“Some may call for continuous trading in the UK but this isn’t worthwhile for the vast majority of private entities as few have enough liquidity demand for this to work,” says Milston. “Even in public markets most listed entities don’t have enough liquidity to support continuous trading.”
Olsen agrees the benefit of the intermittent trading windows offered by PISCES is that it reduces the cost and effort for companies being on the platform as compared to a facility with continuous trading, whilst still providing access to liquidity for shareholders.
