A stock exchange based in the Channel Islands is trying to capitalise on a global drought in initial public offerings with the launch of a facility for buying and selling shares in privately held companies. But this reinvention of its role looks likely to attract stiff competition from larger rivals.
The International Stock Exchange (TISE) — which has, for years, specialised in providing a listing venue for corporate debt — last year launched a unit allowing private companies to run auctions in their own shares, without the need for a broker.
This move comes as more companies choose to remain privately owned for longer, rather than trying to float on a stock exchange. Helped by a glut of capital in private markets, many executives have opted to keep more control over their firm’s direction and to avoid the extra scrutiny and regulatory burdens that come with an initial public offering of shares.
“I think there’s much more demand to stay private, not to be too exposed, not to have too much costs,” TISE’s chief executive Cees Vermaas tells the Financial Times.
The Channel Islands “is an ideal breeding ground for private markets”, he adds, pointing to the many family office investors and funds regulated there.
Set up in 1998 as the Channel Islands Stock Exchange, and based in Guernsey, TISE was initially an exchange for funds.
But, in 2014, the firm was fined £190,000 by the Guernsey Financial Services Commission after a lengthy investigation into the exchange’s role in “transactions [that] had been implicated in possible market manipulation and other forms of irregular trading”. The exchange admitted it was “seriously at fault”.
Private equity veteran Jon Moulton, who had stepped in the previous year to restructure the exchange and rebrand it as the Channel Islands Securities Exchange, described the affair as “very messy”. In 2017, the exchange was renamed TISE.
An initial attempt to start a junior stock market did not take off and, currently, there are only two stocks listed on TISE — one of which is TISE itself. But bonds became a much more lucrative business line, as the exchange was able to offer a rapid service: once the necessary documentation was complete, a listing could take place in just two or three days.
“It’s a very profitable business model,” says Vermaas. “We tried stocks and funds. But it’s the bond market that became successful. If you want to create liquidity [for stocks], you go to London” or elsewhere, he explains. “You need an infrastructure to have efficient markets and you need a liquidity pool.”
However, Vermaas believes that TISE is much better placed to take advantage of the huge boom in private assets that has taken place over the past decade or so.
Unlike a public stock exchange, its new private markets facility allows a company to decide who can and cannot buy its shares. Once trading, which is run like the closing auction at a stock exchange, is over, the owner of the shares can choose whether or not to agree to the price.
Last year, TISE announced that its first private market client was garden centre group Blue Diamond. Vermaas says TISE is already in the process of bringing on board two other private companies and hopes to have 50 companies using its platform over the next five years. These, he adds, could benefit from not only using the share trading facility but also by listing bonds, in order to raise money.
TISE is also in talks with a number of closed-end funds. Vermaas sees an opportunity to use tokenisation technology to help facilitate a secondary market in them.
Industry insiders agree that the potential for private market exchanges is huge, although it is still unclear how companies will decide to facilitate trading in their own shares.
“Although interest in this space is on the rise, there is uncertainty about whether this will translate into actual demand,” says Nick Davis, senior partner at law firm Memery Crystal, and a member of the AIM (Alternative Investment Market) advisory group.
“If it does, it could signify a critical shift as exchanges evolve to meet the needs of private companies — bridging the gap between traditional public markets and private funding options,” he suggests.
But TISE faces a competitive threat from a number of rivals that want a share of this growing market — including a number of crowdfunding platforms and Nasdaq Private Market, which has allowed trading in private company shares for more than a decade.
Meanwhile, the new Labour UK government has said it is “fully committed” to a plan for a private share trading system named Pisces (Private Intermittent Securities and Capital Exchange System).
And the London Stock Exchange is currently developing a market to take advantage of such rules. It remains to be seen, though, whether London will enjoy an advantage over the Channel Islands similar to that it has in public equities — or whether private companies will prefer Guernsey’s regulatory environment.
“Undoubtedly, TISE faces a significant challenge against established competitors like the LSE,” observes Angus Whiteley, chief executive of private market investment and advisory firm Stafford Capital Partners, which manages more than $8.4bn in assets.
“The LSE’s robust market infrastructure and visibility position it favourably against TISE. However, TISE’s unique regulatory environment and operational agility may serve as key differentiators.”
