Companies are trading pre-IPO stocks as a new asset class

By Steve Gelsi

Forge Global teams up with Accuidity to launch an investable private company index

Stock trading may no longer be limited to companies on the New York Stock Exchange or the Nasdaq.

For financial technology company Forge Global Holdings Inc. (FRGE), the universe of private companies that issue stock to employees and institutional investors presents a growing opportunity for its trading platform.

"This is an actual asset class that's forming," Forge Global Chief Executive Kelly Rodriques told MarketWatch. "Private, venture-backed companies are staying private longer, and the ecosystem to enable liquidity in pre-IPO companies is maturing."

Employees at startups and other private companies often own between 10% to 15% of the total stock option pool in a given company, while founders own about 50%. Investors hold the rest, typically.

When Uber Technologies Inc. (UBER) went public in May 2019, it reportedly created 1,000 millionaires out of insiders at the ride-hailing company who had stock. Many of those people were senior engineers or mid-level executives.

Private stock for employees is generally seen as a way to align the financial interests of workers with their parent company.

Nowadays, the universe of private companies that issue stock reaches beyond Silicon Valley software and tech companies to drug companies, biotech companies and financial services.

Other company types with private stock include specialists in artificial intelligence, consumer technology, food technology and industrials.

Employees can sell their stock with Forge Global, which specializes in marketplace infrastructure, data services and technology.

Once private stockholders sell all or some of their stock, many may qualify as accredited investors with at least $1 million of assets outside the value of their home. Others may also reach the level of qualified investors worth at least $5 million.

Forge Global includes a list of frequently asked questions on selling private company stock and answers to those questions on its website.

Accredited investors and qualified investors may also buy private stock as well as sell on the Forge Global platform.

Forge Global isn't the only business aimed at boosting liquidity in private-market stock.

Nasdaq Inc. (NDAQ) has spun out its Nasdaq Private Markets unit, NPM, with backing from Nasdaq, Citigroup Inc. (C), Goldman Sachs Group Inc. (GS), Morgan Stanley (MS) and Allen & Company.

Meanwhile eShares, Inc., which does business as Carta Inc., also offers liquidity solutions for pre-IPO shares. ClearList runs an equities marketplace for private companies. EquityZen Securities LLC runs a platform for private shares.

Combined with Forge Global, these players have brought more scale to the private-stock equity market.

With companies staying private longer, they're usually worth a lot more when they go public in an IPO than they used to be.

Amazon.com (AMZN), for example, only had a market cap of about $440 million when it went public in 1997 as a much smaller company than, say, Arm Holdings (ARM), which had a market cap of $55 billion in its IPO in September.

That means much of the value creation in start-ups takes place in private markets, before companies go public.

With an eye on tracking the value of private companies, Forge Global built the Forge Private Market Index.

Its 73 components include ZocDoc, Stripe, SpaceX, Ripple, Plaid, Kraken, Impossible Foods, Epic Games, Chime, and Anduril. Forge Global plans to add two more companies to the index when it re-sets at the start of 2024.

The index tracks investment gains by its private components as well as returns from the full Forge Global Index. A $10,000 investment in 2019 in the Forge Private Market Index has returned 121% and would be worth about $22,000 now.

Forge Global is now readying a second private market index next year to be offered to qualified investors in an investable product through an alliance with Boston-based institutional asset manager Accuidity LLC.

The product mirrors the world of exchange-traded fund providers such as Fidelity that use indexes authored by other parties such as Dow Jones or Standard & Poor's or many others, to build baskets of stocks for investors.

Forge's second index will be sold by Accuidity through the network of registered investment advisers, family offices and other wealth managers.

Accuidity will publish the second index in early 2024, with plans to reveal its components at that time.

In this case, Accuidity will offer investors access to late-stage, venture-backed companies that are still private.

Accuidity co-founder Vince Gubitosi said wealthy individuals have been interested in getting more exposure to alternatives.

While institutions typically allocate 10% or even 20% to alternatives, wealthy individuals have only low-single-digit percentage exposure to the asset class.

"This is the first time they can get access to an index that is efficient and institutionally managed to this asset class," Gubitosi said.

Meanwhile, Forge Global has been seeing increased volume this year on its platform.

The company reported transaction volume of $253 million in its third quarter, which was up 53% from the second quarter.

Looking ahead, Forge Global Chief Executive Rodriques sees the private market asset class as "accelerating toward a tipping point."

Forge Global's stock has risen 127% so far in 2023, compared to a 42.3% gain by the Nasdaq.

Also read: Why wealthy investors put $125 billion into this new type of private-equity fund last year

-Steve Gelsi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

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12-21-23 1158ET

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