Further Validation of Private Exchanges: Apollo Chooses GSTrUE

Apollo Management clearly sees what Oaktree Capital Management saw: an opportunity to capture the benefits of going public without the hassle of public-company regulatory oversight. The vehicle of choice - Goldman Sachs' GSTrUE platform. From today's Wall Street Journal Interactive:

The private-equity firm founded by Leon Black plans to list its shares on a new Goldman Sachs Group Inc. exchange -- available only to institutional and other sophisticated investors -- that promises to limit members' exposure to the heavy scrutiny that comes with public markets. This listing would come after Apollo sells a stake in itself to the investment arm of the Abu Dhabi government and most likely another stake to the California Public Employees' Retirement System.

I've written about this quite a bit, as I am firmly of the belief that GSTrUE presents a real threat to U.S. public exchanges for the best new issuers in the hottest segments of the market, i.e., alternative asset management. Further, a company like Apollo is more likely to capture the interest of Institutional investors then, say, a hot little consumer brand, rendering the limited investor syndicate (less than 500 investors, each of which is "accredited") a manageable liability.

Also, by listing on Goldman's new exchange, dubbed "GS Tradable Unregistered Equity OTC Market," or GSTrUE, Apollo won't exactly go public, as Blackstone and Fortress have done. That is because the exchange is private and barred to retail, or individual investors, and therefore enables Apollo to avoid most of the regulatory requirements of a traditional share offering. Such private share placements, for instance, don't require a company to register with the Securities and Exchange Commission and limit the financial details that must be disclosed to the public.

And Leon Black, smart, aggressive yet prudent risk-taker that he is, has chosen to sell a stake in Apollo pre-offering to ADIA, the Abu Dhabi Investment Authority. He is taking a page out of the Fortress playbook, creating a floor value for Apollo's shares pre-issuance.

New York-based Apollo's sale of a stake of just less than 10% to the Abu Dhabi Investment Authority closely resembles Blackstone Group's sale of less than 10% of its management company to the investment arm of the Chinese government. The Abu Dhabi Investment Authority's 10% stake is expected to involve no voting rights or active involvement to avoid any possible backlash.

I am confident that, like Oaktree, the offering will proceed without a hitch, and that Apollo won't be the last firm to use private exchanges as the best of all worlds: attractive IPO proceeds, a strong, Institutional syndicate and avoidance of burdensome and costly SEC regulations. To Mr. Cox and your friends Congress, I was right before and I'm right now - take this threat seriously. Because this little trickle could soon turn into a golden leak that bifurcates the U.S. new issue market in a way that deeply hurts the perception of the domestic public markets. Listen to Mr. Market and re-visit this issue - and fast - before permanent damage is done.

Comments

[Giuseppe]

In Italy we are following a different approach: we are building up a new market, dedicated to institutional investors (called "Mercato Alternativo del Capitale") and to small companies. It will start in the next few weeks and it will be managed by the official Stock Exchange. Maybe it could be a good idea to analyse this new market.
There are already around 10 small (and interesting !) companies that will be listed in the first month.

[Matt]

It will be interesting to see how many more companies decide to not list on the public exchanges and instead list on GSTrUE or portal. As private equity continues to grow, I think more of these private listings may be common.

[Roger]

Justin, with all due respect, your comment makes absolutely no sense. "A head start they don't really need?" For what? They can get many of the benefits of a public issuance via GSTrUE without the regulatory hassle. And to be sure, GSTrUE is demonstrably NOT a market designed for hot little consumer companies. We have something called the NASDAQ for that.

As it relates to that article you forwarded, I don't need KnolwedgeMap or any other tool to understand the likely interconnections among those at top alternative asset managers and top brokerage firms. They exist all over the place. This is a fact. So the issue you raise is a red herring, specifically because it is such a common occurrence.

Ergo, I don't get you.

[Justin]

It looks like Apollo is taking advantage of of GSTrUE for a head start that they don't really need and shouldn't be helpful for those "hot little consumer brands" that the market is really intended for.

NewsVisual has a pretty intersting article up right now related to this whole deal-- about possibly why Goldman was so eager to make that concession to Apollo: http://www.newsvisual.com/newsvisual/2007/07/ties-to-goldman.html

[Yaser Anwar]

GSTrUE has had two successful issuances so far. Why do you think someone like KKR didn't go this route instead of the public market IPO? Is it because they can raise more money, which seems to be the case, in the public market?

I guess part of the answer would be because they need a currency to attract talent (ya right, like they would have any problems doing that).