Frenemies: SecondMarket Brushes Off Facebook

The alternative investments exchange SecondMarket was founded in 2004, but in many ways, Facebook put the company on the map. Facebook produced a huge amount of money for the New York outfit once it began selling private company shares in 2009. More than that, Facebook earned SecondMarket mindshare with new institutional investors who were interested in jumping into the tech startup game.

When Facebook’s IPO went south, however, the perceived value of SecondMarket also took a major hit. With little or no IPO window available, buying stock in illiquid private companies suddenly seemed much less attractive.

Some might say that SecondMarket investors, who’ve poured $34 million into the company, missed their exit window; that is, the chances that they’ll receive a multiple on their investment is lower now than when Facebook stock was red hot. But SecondMarket’s earliest investor, FirstMark Capital, hasn’t sold any of its shares because managing director Lawrence Lenihan thinks SecondMarket can still generate huge upside for investors. In fact, Lenihan is so bullish on SecondMarket that he says he’ll eventually liquidate FirstMark’s entire position in SecondMarket on its platform.(SecondMarket says it has no plans to go public.)

Much of Lenihan’s enthusiasm centers on SecondMarket’s new strategy to launch access to different commodities every two weeks. “Our users wanted more unique, non-correlated, diverse opportunities,” says Jeremy Smith, chief strategy officer at SecondMarket. “So three months ago we embarked [on a program to] connect investors with fund managers who have expertise in a variety of asset classes.”

Today, for example, SecondMarket investors can access a fine art fund, a rare gem and diamonds fund, a peer-to-peer loan fund, and a gold fund, paying a “2 and 20 fee structure” for the privilege. And SecondMarket has plans to roll out access to a number of other funds through at least October, including, possibly, a water rights fund and a classic cars fund.

“We became most well-known as a private company stock market,” says Smith, “but our roots are as a multi-asset platform,” where trading alternative assets like distressed securities still account for 60 percent of revenue. “This is really an expansion of that,” he says.

Only time will tell if the funds capture the imagination of SecondMarket users. “It does feel a bit like they’re throwing almost anything at the wall and seeing if it sticks — and none of it will make up for the loss of Facebook trading,” says Sam Hamadeh, founder of the New York research firm PrivCo. (Before its May IPO, Facebook trades accounted for 40 percent of SecondMarket’s private company business.)

Certainly, there’s the risk that the funds will underperform, not least because some of them, all run by third parties, are also somewhat young. For instance, the fine art fund that SecondMarket’s clients can now access is eight years old.

For his part, Smith says that most fine art funds are even younger. He also says that SecondMarket doesn’t push its new offerings on its accredited investor base so much as make them aware that they’re available. And he says that SecondMarket is doing what it can to protect its clients by “verifying that a fund isn’t fraudulent, that it has a viable strategy, and that the managers are competent” and have a track record.

Not last, Smith observes that investing is inherently risky, no matter where it’s done. “Do I think there’s more risk on the private market?” he says. “No, I don’t believe that’s the case at all.”

Lenihan is counting on it.

“We’ve had a crisis in trust, not economics,” says Lenihan. “The Facebook [IPO] underscored that these huge banks lie and investors lie and there is fraud. My vision for SecondMarket is to be that shining city on the hill that enables investors and assets to interact with clarity, transparency, and accountability.”

Facebook, he adds, “was one of the greatest things to happen to this market, but it made us look like all we [traded in was] Facebook. And what we’re doing is so much more powerful than that.”

SecondMarket’s team is “smart,” says Hamadeh. “It should figure out a way to grow past this period of transition.”

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