Grey Markets in Private Companies

Grey market trading in private company shares can be pretty funky – producing unique opportunities and challenges. Many stemming from limited regulatory or liquidity-driven oversight. Investors can commonly accumulate or dispose of private company positions without drawing too much regulatory and/or volume attention. The same is awkwardly true for companies and their insiders themselves. For instance, with less restrictive disclosure requirements, a private oil company could feasibly accumulate substantially more land in a highly prospective area than a public company with material purchase disclosure requirements may be able to. 

There is one opportunity special to private company grey markets that I have pursued on more than one occasion – bidding aggressively for new companies with celebrity management teams three to six months after their initial financing round.

In such cases, it has generally worked out to pay a 10% to 30% or so premium shortly after an initial financing round when the management team that has historically created big value and they have teed up acquisitions and other catalysts prior to funding the company. Some people can’t help but take 20% in just three or four months on anything, but the stock likely isn’t going lower anytime soon if the management team just created multiple 5 plus baggers for people. These don’t come around very often but they do come around.

Be VERY VERY picky in the private investment world nonetheless. It pains me greatly to hear financial evangelists recommending people invest in private companies and limited partnerships (LP) because that is how they made some dough – often leaving out relevant details like the value of their relationship with a billionaire or that they were the general partner (GP) earning aggressive fees off of LP investors. Make sure you know what you are getting into before investing in private securities. I have seen many more disasters than successes here, and you can’t do anything about it if the tide moves against you. Liquidity matters.