Tuesday, July 17, 2007
It is being reported that Apollo Management, L.P., the private equity fund adviser, will offer shares and list itself on Goldman Sachs' new, private exchange GS Tradable Unregistered Equity OTC Market, known by the more catchy acronym "GSTrUE". Similar to Blackstone's ipo sale of a significant stake to the Chinese government, Apollo is also reportedly selling an approximate 10% non-voting stake in itself to the Abu Dhabi Investment Authority, the investment arm of the Abu Dhabi government, and possibly another significant stake to the California Public Employees' Retirement System.
This is GSTrUE's second listing. In May Oaktree Capital Management LLC, an alternative investment firm with over $40 billion in assets under management, sold approximately 14% of itself for more than $800 million to less than 50 investors listing its shares on GSTrUE. According to reports, Goldman is hoping that GSTrUE will become a viable alternative listing market for hedge funds, private equity and operating companies who wish to avoid SEC regulation. Accordingly, so as to permit Rule 144A offerings, the market will be limited to qualifying investment funds with over $100 million in investable assets. As I posted at the time of the Oaktree offering:
GSTrUE, however, will live under the shadow of U.S. regulation. In order to avoid triggering Exchange Act reporting requirements for any listed company, Goldman and any such listed U.S. entity will need to make sure that the company does not exceed more than 500 shareholders. This will likely place Goldman in the position of forced market maker when the cap is reached. It will also even further reduce liquidity by limiting the number of trading shareholders and shares traded. Moreover, Goldman has not disclosed whether there will be any other market makers for this market, but given the likely low liquidity and shareholder trading limitations, Goldman is likely to set fat spreads on trades. Pricing is also likely to be opaque due to information and analysts' coverage gaps. While Goldman has incentives to maintain lower spreads in order to attract listings, these problems may be why Oaktree's offering values it at only $5.7 billion, a much lower valuation than Fortress and the one mooted for Blackstone. Time will tell if GSTrUE is a success, and it is certainly a worthwhile economic experiment on the validity of private markets, but I believe that GSTrUE's handicaps will likely make it more of a stepping stone for companies on their way to a full public market listing more than anything else.