Barry Silbert, ceo of SecondMarket, answers SCI's questions

Barry Silbert

Q: How and when did your firm become involved in the structured credit market?
A: I previously worked at Houlihan Lokey, where my focus was on restructuring and distressed workouts. This was during the time of the Enron and WorldCom defaults. The idea for SecondMarket was developed from my experiences there: to create a marketplace for different asset classes that are initially illiquid or become illiquid over time.

The SecondMarket platform launched in 2004, beginning in restricted stock/illiquid blocks of public companies and focusing on the apparent liquidity discount. We continued to build out the technology aspects of the platform, including the settlement mechanism, as well as developing a network of buyers and sellers.

Q: Which market constituent is your main client base? Do you focus on a broad range of asset classes or only one?
A: In order to prepare for what we anticipated would be a bad 2008 for the financial markets, we sourced some venture capital in 2007 to enable us to expand into other asset classes. The freezing up of the auction-rate securities (ARS) market in February 2008 provided us with our first opportunity to demonstrate that the SecondMarket platform could expand successfully. Within 1.5 weeks of the auctions failing, we were seeing volume in student loan, CDO and XXX ARS.

The next asset class to launch on the platform was for bankruptcy claims, where creditors can sell their claims rather than wait for years for them to be resolved. With around US$1trn of bankruptcy claims outstanding, we're adding efficiency and transparency to this process as well. We expect trading in this asset class to grow as bankruptcies increase.

Q: What is your strategy?
A: Our current focus is on rolling out four new asset classes, beginning this week with limited partnerships in hedge funds, private equity funds and venture capital funds. There is certainly a gap in the market for this, given the near term need for asset managers to gate funds or make capital calls relative to LPs' needs to rebalance portfolios and conserve cash.

The next asset classes scheduled for launch are private companies, CDOs and MBS. There is a need for price discovery and transparency in these sectors, and our model is tailored for such a scenario.

The main reason why these products are illiquid is because they are buy-and-hold investments and so there isn't much information available on the securities and not that many institutions are familiar with digging into the underlying data. We're upgrading the platform to try and help with this situation.

The current platform offers price discovery via the process of matching bids and offers. The new platform will include three new functionalities, the first being an auction process.

We've created a new type of auction for CDOs and MBS called a Manhattan Auction, whereby potential buyers are economically incentivised to make bids. Under this process, the seller carves out a portion of the proceeds which will be paid out to the bidders at its discretion.

There are two types of potential buyers: those that test the market with a minimal bid (and in so doing establish a floor price); and those that are serious about buying and so will bid aggressively (in which case the seller fee essentially serves as a discount on their purchase). Either way, the objective is to bring significant new private capital to the marketplace.

Anyone can bid, but they can't withdraw their portion of the fee until they've actually completed a transaction. This is to ensure that participants are bona fide in order to protect the integrity of the system. Most deals are settled through escrow, so there's no counterparty risk.

The second new functionality is to provide free data and analytics. We've gone through 2000 offering circulars and servicing reports and synthesised them into the basic information an investor would need to know about a certain asset.

The third functionality is the creation of an ecosystem, which enables investors to access third-party resources, such as valuation, research and data analysis, on the platform. So far 30 third-party organisations have verbally committed to being part of the ecosystem.

Q: How do you differentiate yourself from your competitors?
A: Obviously traders and/or brokers in the larger asset classes could conceivably compete with SecondMarket. However, we're focusing on complex assets that are difficult to value, so we'd encourage them to use our platform as a place to generate liquidity.

We have good relationships with participants in the CDO and MBS sectors, having established ourselves as an independent marketplace and not simply a technology platform. We're hiring aggressively and so there is always someone to call if a user has a question or if a seller wants us to handle a sale for them indirectly. Among our hires are Bill Seidman - the former chairman of the Resolution Trust Corporation (RTC) and Federal Deposit Insurance Corporation (FDIC) - who is a senior advisor, and Richard Gugliada - the former head of CDOs at S&P - who has helped us develop the data and analytics side of the business.

Q: Which challenges/opportunities does the current financial environment offer your business and how do you intend to manage them?
A: As well as working to bring in private capital (which will ultimately solve the market's asset overhang problem), we've had meetings with various governments about how we can help. Under the second part of TARP, for example, it is likely that sellers will have to agree to certain restrictions, so we could emerge as an alternative marketplace for asset liquidations. Alternatively, the Manhattan Auction could prove to be a useful way for the government to dispose of certain assets.

Q: What major developments do you need/expect from the market in the future?
A: Ultimately, we want to become the market leader in illiquid asset trading and so we have identified and are tracking around 50 different asset classes that we could potentially expand into over time. The timing depends on hiring the right people and making the right technology enhancements in order to create a world-class platform that is attractive to private capital.

About SecondMarket
SecondMarket (formerly known as Restricted Stock Partners) is the largest centralised marketplace for illiquid assets, such as auction-rate securities, bankruptcy claims and restricted securities in public companies. SecondMarket's online trading platform has nearly 2,000 participants, including global financial institutions, hedge funds, private equity firms, mutual funds, corporations and other institutional and accredited investors that collectively manage over US$500bn in assets available for investment.

In addition, SecondMarket facilitates all administrative and settlement support services for executing both private and public transactions involving illiquid assets. The company has the expertise to handle even the most complex transactions efficiently. Its team manages the entire process, from pre-sale due diligence through execution and settlement, to ensure regulatory compliance and the most efficient settlement possible.

CS