All good things must come to an end, and so it is withSecondMarket Inc.'s four-year run as the biggest private market forbuyers and sellers of Facebook Inc. shares.

The initial public offering Facebook has planned for todayforced an end to the private trading, which has driven thecompany's valuation up more than 10-fold since 2008 to exceed $100billion. Commissions on Facebook trading may have accounted foralmost a third of SecondMarket's revenue last year.

The challenge to replace those sales has forced SecondMarketChief Executive Officer Barry Silbert, 36, to turn to even moreexotic investment opportunities to retain his 100,000 wealthyindividuals and institutions: wine, fine art, diamonds,intellectual property and other so-called alternative assets.

“They were probably always going to go down this route, and nowit's just a little more a question of survival than a question ofgrowth,” said Adam Sussman, partner and director of research atTabb Group in New York.

SecondMarket, based in New York, plans to raise money from itsclients for at least eight different investment funds, run byoutside managers, Chief Strategy Officer Jeremy Smith said. It hasalready raised almost $3.5 million for a venture capital fund thatspecializes in educational-technology companies. It's also tryingto raise money for a planned $200 million fund for investing inwine and a $500 million one for distressed residential loans.SecondMarket's revenue would likely come from commissions ormanagement fees, Smith said.

“These are next-generation alternatives,” Smith, 36, said in anApril 13 interview. “We've got all these people together, and mostof them came because they wanted to invest in privatecompanies.”

SecondMarket's biggest business segment now is trading fixedincome securities, ranging from bankruptcy claims to asset-backedbonds and auction rate preferred securities, said Bill Siegel,SecondMarket's senior vice president of new ventures.

SecondMarket and Facebook had an almost symbiotic relationship.SecondMarket started in 2004, handling its first trade in Facebookin April 2008, when the social-networking company was worth afraction of the $104 billion valuation that it's seeking in itsIPO. The following year, private trades valued it at $5.6 billion,according to New York-based research firm PrivCo.

The offering of 421.2 million shares at $34 to $38 each,scheduled to price today, would make Facebook more valuable thanWalt Disney Co.

Stock Commissions

Meanwhile, SecondMarket grew in revenue and public recognition.Its reliance on Facebook was evident in 2011. The value oftransactions in all private shares at the firm jumped 55 percentthat year to $558 million, even while some of its most-tradedstocks, such as LinkedIn Corp., Groupon Inc. and Zynga Inc., leftfor the public markets.

A SecondMarket regulatory filing in February hinted at theeffect of losing Facebook. It said commissions generated by “oneissuer” generated 31 percent of the company's revenue last year.Smith said only that private-company stock trading has accountedfor about a third of SecondMarket's overall revenue, and of that,Facebook during certain periods may have accounted for more thanhalf.

SecondMarket doesn't disclose its commissions or management feesit collects from clients. SecondMarket spokeswoman Aishwarya Iyerdeclined to comment.

After Facebook, the most-watched companies remaining onSecondMarket's platform include Twitter Inc., Foursquare Labs Inc.and Dropbox Inc., according to its website. While popular, “noother company has materialized that takes the place of Facebook,”said PrivCo Chief Executive Officer Sam Hamadeh. “They realize thisgravy train is fading fast.”

Trading on SecondMarket and smaller rival SharesPost Inc., basedin San Bruno, California, is limited to so-called accreditedinvestors who have at least $1 million in assets excluding theirprimary residence, or $200,000 in annual income, as required byU.S. Securities and Exchange Commission rules.

SecondMarket may get a boost from the Jumpstart Our BusinessStartups Act, signed into law on April 5. The law ends a ban onadvertising private investments to non-accredited investors, easingthe way for both SecondMarket and SharesPost to jump into thatbusiness, according to Smith and SharesPost founder GregBrogger.

JOBS Act

“The regulations have kept the business from being scalable,”said Brogger. “We are looking for a variety of ways to routeinvestors' capital into these companies.”

The JOBS Act may also broaden the universe of stocks availablefor trading on these platforms. It allows companies to amass moreshareholders while staying private. Facebook was pushed to completeits IPO this year partly because it had surpassed 499 shareholders,requiring the company under U.S. regulations to begin disclosingfinancial information as a public company, people familiar with thematter have said.

According to Siegel, 32, SecondMarket has been “baking” itsdiversification strategy for a while.

“This is an extension of the philosophy of giving our investorsaccess to unique alternative asset classes,” he said.

Bloomberg News

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