Out of the Rubble

For most people illiquidity is a financial nightmare. For Barry Silbert it’s a dream come true.

The more desperate people are to unload stuck assets, the more money he makes.

Holding shares of a private company? SecondMarket, Silbert’s New York–based firm, will make a market in them. Left with auction-rate securities because the market has broken down since February 2008? Sell them through SecondMarket. Restricted shares in public firms, partnership interests in hedge funds, bankruptcy claims or venture capital funds — SecondMarket will provide valuation analysis and other relevant data to sellers and potential buyers alike and serve as clearinghouse and transfer agent. The firm currently quotes bankruptcy claims on Lehman Brothers Holdings at less than 10 cents on the dollar.

“There are trillions of dollars in illiquid assets out there, but the pipes to move them are clogged,” Silbert says. “We are creating the only transparent market to trade them.”

For example, the “difficult economic climate” caused Facebook to delay plans to create an internal market for trading its stock, says company spokesman Larry Yu. But SecondMarket has been trading Facebook shares since March. Yu would not disclose Facebook’s value, but others close to the company say its shares are trading at levels that indicate a total value of less than $4 billion — less than half its valuation in mid-2008, when the market was stronger.

SecondMarket has plenty of competition from private companies and other sources. In November 2007 the Nasdaq Stock Market and a group of securities firms, including Goldman Sachs Group and Bank of America Corp., formed the Portal Alliance to create a standardized place to trade unregistered securities.

Silbert was a 28-year-old investment banker at Houlihan Lokey Howard & Zukin when he founded SecondMarket, originally known as Restricted Stock Partners, in early 2004. That summer Bradford Monks, a 38-year-old Orrick, Herrington & Sutcliffe lawyer whom Silbert had often worked with on deals, signed on as his partner.

At Houlihan (which in 2006 was acquired by the U.S. arm of Japan’s ORIX Corp.), Silbert had a front-row seat at the Enron Corp. debacle, representing many creditors. Seeing the negative effects of leverage, Silbert says, made him fiscally conservative.

这次经历激励他创造yembermarket。他在他的公寓里运营，直到他买得起的办公室租金。(In November — four years and five offices later — SecondMarket moved into 24,000 square feet of space in New York’s financial district.) SecondMarket raised $350,000 from angel investors in its first couple of years, and then sold a 20 percent interest to New York venture capital firm FirstMark Capital for $3.8 million in 2007. “We haven’t actually used the money; it’s in the bank,” Silbert says. (The funding marked a bittersweet moment — Monks died of cancer shortly after the deal was signed.)

About 1,900 accredited investors are on SecondMarket’s roster of potential buyers. Each has been rated using 75 algorithms that help pinpoint which instruments would most interest them. Sellers list the assets they want to sell, and SecondMarket notifies the most likely buyers. Right now the seller sets the price, but Silbert plans to introduce a bidding process.

SecondMarket’s revenue topped $20 million in 2008. The firm has more than 60 employees and handled more than $1 billion in transactions last year, charging fees (split between buyer and seller) that range from 2 to 5 percent per trade. L. William Seidman, 87, ex-chief of the Resolution Trust Corp., joined the board in December and will help SecondMarket extend into collateralized debt obligations and securitized mortgages and asset sales to the government. Silbert predicts that SecondMarket’s revenues will double in 2009. He doubts that an economic recovery — which he doesn’t expect until mid-2010 — will hurt business. “A booming economy always yields new types of investments that need a place to trade,” he says.