As a former financial advisor, I know how difficult it is to help clients beat the market, especially in the current climate. I also understand how trading works, having spent 15 years at the New York Stock Exchange and Bats Global Markets, two of the largest – and most liquid – stock markets in the world.
After leaving the NYSE, I co-founded Realto.ai to leverage my experience with the goal of developing and growing a new marketplace that would make it easier to trade securities that are traditionally hard to buy and sell. So, with that in mind, let’s look at some of the common myths that currently surround secondary market liquidity:
MYTH #1: It’s always best to rely upon a sponsor-led liquidity event.
THE TRUTH: Waiting can cost investors twice – in time and money.
One case in point is the tale of CION Investment Corp. (CION), which listed on the NYSE on Oct. 5, 2021. CION’s stated NAV at the time was $16.34, after accounting for its reverse stock split. The company restricted the sale of securities to three windows during a 270-day period. With limited buyside, the stock had significant downward pressure each time a new window was opened, and the stock ultimately traded as low as $7.83 per share, 52% below its most recently published NAV.
A different example is Phillips Edison (PECO), which by almost any account would be considered a very successful listing event. However, in 2021, just prior to its listing on NASDAQ, PECO initiated a self-tender for $77 million of shares at a price of $5.75 per share. That’s equal to $17.25 a share after its IPO and a 3-for-1 reverse stock split.
A few months later, PECO announced its IPO price at $28 per share, or about $3.50 under its NAV at the time. Now the shares are trading near $34, which is about double last year’s tender price. Indeed, sponsor-led tenders are not always the right choice for investors, but this PECO deal, like many others, appears to have been very good for the sponsor, rather than the investor.
I recently wrote a blog that explored several other sponsor-led deals that proved to not be in the best interests of investors. You can read it here.
MYTH #2: A mini-tender is usually the best way for an investor to realize a gain from an illiquid investment.
THE TRUTH: Mini-tenders are frequently the ultimate wolf-in-sheep’s-clothing deals.
Take MacKenzie Capital Management’s recent $3.50 per share offer to investors in Franklin BSP, a business development company that saw its stock trading at $6.40 on the Realto.ai automated, web-based platform.
MacKenzie proposed to buy up to 5% of Franklin’s shares at a discount of around 45%. That’s not a misprint and, sadly, offers like these aren’t unusual, either from MacKenzie or many of the similar firms entrenched in the mini-tender markets.
I explored MacKenzie’s Franklin BSP tender offer further in a recent blog. You can read the post here.
MYTH #3: A viable secondary market does not exist for illiquid investments.
THE TRUTH: Realto.ai is a marketplace specifically designed to trade illiquid investments.
For years, it has been difficult to trade largely illiquid securities in the secondary market, with potential buyers and sellers passing one another like proverbial ships in the night. Throw in high commissions and a lengthy settlement cycle and the trading experience has long been as joyful as a root canal. With no anesthesia.
Since there wasn’t a solution, we decided to build one. And now, there’s Realto.ai, which is an SEC-regulated alternative trading system (ATS) that leverages active buyers and sellers using our proprietary technology. Plain and simple, we operate a marketplace, dispelling the aforementioned myths with reputable, seasoned market makers submitting competing bids and offers.
Here’s how it works: An investor creates a login, sets up their account, and starts trading. The process is fast, simple and affordable. Click here to see how easy it is to set up an account. The investor can name their own price or execute immediately with a bid that is already on the screen. We also offer tools for advisors that allow them to assist their clients through the process. It’s easy and transparent.
It should be noted that despite the merits of Realto’s trading system, there is no guarantee that a market will develop for some securities, which may remain illiquid, and conflicts of interest may exist between investors and Realto.
Of course, not all mini-tenders and sponsor-led liquidity events are bad, though they’re often not the best solution for the investor. And that’s where you, the trusted financial advisor, come in, informing clients of the legitimate options that exist for them to trade their shares in the secondary markets. Adding value, as you so often do.
Join Realto.ai and see how we make it easy to trade securities that are traditionally hard to sell and start solving your clients’ liquidity problems today.
Every investment carries specific risks. Investing in the securities discussed is not suitable for all investors as these securities are speculative and involve a high degree of risk. All investors should obtain additional information about potential investments, such as financial projections, legal advice, and other important material. Investors must be prepared to withstand a total loss of their investment.
Realto is a sponsor of The DI Wire, and the article was published as part of their standard directory sponsorship package.