SecondMarket is most popularly known as a private company equity exchange and indeed, the startup’s fastest-growing business consists of private company stock sales. That would be the Facebook and Twitter and other pre-IPO share shuffling that happens before a company goes public. And of course, a lot of demand is in tech (although PIMCO has traded on SecondMarket before, as has SecondMarket).
But a report out this month reminds us that one of SecondMarket’s most important and perhaps unexpected services involves transactions related to bankruptcy. SecondMarket compiles data about bankruptcy asset transactions and calculated that bankruptcy claims slowed in October.
The company doesn’t say how much revenue comes from bankruptcy claims, but it says the bulk of its revenue comes from fixed income securities such as debt instruments and asset-backed securities. Bloomberg reported that SecondMarket did $400 million in private company shares in 2010 and is on track to do $1 billion.
In 2008 after the financial crisis, SecondMarket found a robust business liquidating assets that turned up in bankruptcy. SecondMarket explains:
Sellers of bankruptcy claims can be either: A) creditors that have extended unsecured credit to the debtor company (most commonly trade suppliers of materials or services); or B) secured creditors (most commonly financial institutions) that have obtained collateral to secure an advance of credit to the debtor.
For example, if Company A is a paper supplier and its largest customer, Company B, files for bankruptcy and suspends payment of its invoices, the impact on Company A can be very severe. It’s possible that Company B’s debt represents a large portion of Company A’s total outstanding accounts receivable. Under these conditions, Company A may not have the time to wait for Company B to reorganize. Even if Company A is fairly sure that it will eventually recover a large percentage of the debt owed it, it simply may not be able to afford the wait. Therefore, Company A will look to sell those claims – and investors/potential buyers see this as a potential investment/business opportunity, and that’s where SecondMarket comes in.
What do you do when someone like, say, Lehman Brothers goes bankrupt? “SecondMarket has brought together more than 50,000 individuals and institutions that want to find new investments, connect with other investors, and buy or sell assets, such as bankruptcy claims,” the company says on its website. SecondMarket is still dealing with Lehman assets, a company spokesperson said.
The trafficking in private tech company stock started when a former Facebook employee approached the company in late 2008. He’d found SecondMarket on Google and wanted to sell his stock options to a third party. Soon the startup realized there was a healthy business in Facebook stock. A year ago, CEO Barry Silbert told Betabeat that SecondMarket was trading stock for 40-some companies, mostly technology-based and all venture-backed. We’re sure the number has gone up by now. But buffered by securities trades and the recession-proof bankruptcy biz, SecondMarket has a diversified income stream.
CORRECTIONS: An earlier version of this post said SecondMarket’s bankruptcy transactions totaled $3.5 billion in October and therefore outpaced its other markets; that is incorrect. That data was for the bankruptcy claims market as a whole. Betabeat regrets the error.