Market for hard-to-sell assets gets a big boost

By Scott Cendrowski, reporter


NEW YORK (Fortune Magazine) -- The charity foundation of Li Ka-shing, Hong Kong's richest man, and Singapore's sovereign wealth fund said Tuesday they had invested $15 million in SecondMarket. You may not have heard of this fast-growing New York-based company, but it's created new exchanges where companies and investors can sell assets they might otherwise have had trouble unloading.

Some examples of what you'll find trading there: Lehman Brothers' bankruptcy claims, collateralized debt obligations (CDOs), mortgage-backed securities, and other so-called illiquid assets.

Until now, the six-year-old company has run trading platforms only for U.S. assets, but the investment by Li and Singapore's sovereign wealth fund Temasek Holdings will likely create new exchanges for illiquid assets in Hong Kong and elsewhere. That should increase the number of potential buyers and sellers for SecondMarket's existing inventory. Even more importantly, it could provide additional liquidity in China's private companies and red-hot real estate market.

SecondMarket wouldn't discuss what specific asset exchanges would be created in Asia, but its chief strategy officer, Jeremy Smith, said illiquid debt, equity and real-estate securities offer the most opportunity.

Barry Silbert started SecondMarket in 2004 after advising distressed companies for investment bank Houlihan Lokey. He opened the marketplace at an opportune time. Just three years later, as subprime losses rocked Wall Street, banks and other companies were looking for a market to quickly unload hard-to-trade assets like CDOs and mortgage-backed securities.

The exchange operator says it boasts an inventory of $25 billion in illiquid assets, up from $100 million at the end of 2007. The dramatic rise was driven by the bankruptcy of Lehman Brothers in 2008 (SecondMarket is where many Lehman claims ended up for sale) and SecondMarket's new exchanges for CDOs and other toxic Wall Street creations. Revenues rose too, reaching $35 million last year, up from $20 million in 2008.

The company now competes with large banks to trade illiquid assets, especially as markets for toxic assets have calmed over the past year. But it's also successfully created markets for private shares of companies such as Facebook, which has a large number of employee shareholders.

Venture capitalists have swarmed around SecondMarket in the past year, hoping to profit from its growth as its inventory rose. But the company has rebuffed additional capital until now because it didn't need the cash and offers didn't include the same type of overseas partners. Li Ka-shing and Temasek Holdings are respected investors with deep ties in Asia.

In a statement, Frank Sixt, a director at the Li Ka-Shing Foundation, said: "We believe that SecondMarket's model of transparency, centralization and independence represents an innovative development and potentially significant opportunity in financial markets." To top of page

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