Silicon Valley start-up launches infra secondaries exchange

Buying a stake in a bridge or a toll road could soon begin with the click of a mouse, thanks to a Silicon Valley start-up pioneering a virtual marketplace to bring together buyers and sellers of infrastructure and other alternative assets.

The start-up, Mountain View, California-based Zanbato Group, is currently beta-testing a software platform that allows owners of infrastructure to post profiles of their assets and fund interests and see if anyone is interested in buying them.

A demo version of Zanbato, for example, lists only “North America Bridge” and an estimated enterprise value of “greater than US$1 billion”, rather than giving the precise name, location and value of the asset.Orr said the idea for the platform came from his academic and consulting work at Stanford University, where he leads the Collaboratory on Research on Global Projects, a research centre focused on infrastructure finance. He heard a lot of pension chief investment officers complain about infrastructure’s illiquidity and thought an online marketplace could help alleviate part of that problem by enabling more secondary trading.
“This is a way you go, ‘ok, I’m going to list my $50 million interest in the Chicago Skyway or my $20 million interest in the Macquarie European Infrastructure Fund on Zanbato as something I want to sell,” said Murray Bleach, former head of Macquarie Group’s US operations and an investor in Zanbato. “It’s a means of you being able to put those assets into the market and getting bids on them from professional investors.”

“It’s eHarmony for infrastructure investments,” said Bob Rice, managing partner at New York-based Tangent Capital, a broker-dealer in privately-traded securities.

More than 80 investors have already signed up for the site’s limited beta release, according to founder Ryan Orr, who launched Zanbato last August with the backing of Silicon Valley investor and entrepreneur Joe Lonsdale.

“A piece of the inspiration was that we could really, if we all worked collaboratively as a community to create a point of access to the asset class, we could promote the overall asset class and grow it substantially over the next decade,” Orr said.

“I don’t see why we can’t take it from less than 1 percent of institutional portfolios now to 5 percent or more over the next decade,” he added.

A lot of other asset classes, including real estate, hedge funds and private equity, already have similar websites, such as LoopNet.com, Hedgebay.com and SecondMarket.com. In Silicon Valley-speak they’re called private market networks, or PMNs – websites that introduce buyers and sellers. Zanbato will be the first PMN for infrastructure, and can eventually expand to other alternative asset classes, Orr said.

“Finance and banking has for the most part been a relational activity. PMNs represent the next phase of the development of the financial market,” Orr said.

Orr cautions, though, that Zanbato’s goal is not to supplant bankers, lawyers, placement agents, and other market participants. That’s because Zanbato dealers can’t actually clear trades on Zanbato – they still need advisors to do that – but can use the platform as a means of introduction to find market participants willing to work with them.

“I think it is really a highly complementary service,” said Rob Collins, who heads Americas infrastructure investment banking at Greenhill and initially advised Zanbato’s founders on their venture. “I think it will help for secondary and also certain primary transactions to get done with global investor input and that’s another niche that this platform will serve nicely.”

Bob Rice, the private security broker-dealer, agrees: “I think people who are great advisors and who are really savvy at their jobs will still do very well but people aren’t going to get paid in the future, I believe, because of their rolodexes,” Rice said, adding that he is aware of five other groups putting together PMNs for secondary private equity fund interests.

But not all market participants are optimistic that a PMN could be effective in putting together buyers and sellers of secondary fund interests. “General partners are terribly sensitive about who gets what information about what they do,” said one broker of secondaries who is skeptical of PMNs. “If you were tempted to put up information [about Goldman Sachs Infrastructure Partners], Goldman would be all over you like a rash,” the broker added.

Orr acknowledges that confidentiality is a major concern for private market transactions but believes his software engineers have crafted an appropriate solution to the problem. When users post profiles of what they wish to sell, they can anonymise certain information, such as the name of the fund they are looking to sell or the location and type of infrastructure asset, and only share its precise identity once they’ve received an indication from someone they trust.

Use of Zanbato is free for now. That could change in the future – subscription fees, advertising fees and possibly nominal deal success fees are being contemplated for 2012 – but Lonsdale, the Silicon Valley investor, cautions that the focus for now is on building out a valuable network of users.

“It’s very similar to Facebook or anything else,” he said, referencing the immensely popular social networking website. “It’s really important that we’re aiming to be the very best possible technology for everyone and then worry about making money.”

Another round of financing is also in the works. The company raised between $2 million and $3 million from angel investors and a Series A financing in January, Orr said, and is looking to close a series B by the end of the year.