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.