Valuations for social media groups such as Facebook and Groupon continue to soar in the first quarter, as measured by prices on secondary markets for their shares, though prices have been crimped by growing restrictions on employee trading.
Facebook, the world’s largest social network, saw its valuation jump 58 per cent to $65bn in trading by institutions, according to a quarterly survey released on Friday by Nyppex, a New York-based marketplace and advisory for private securities.
Private securities are those not registered with the SEC, meaning that the companies do not have to report detailed financial information. Trading such shares is restricted to institutions and qualified individuals who meet certain guidelines, such as $1m in net worth.
The valuation of Zynga, maker of Facebook games such as Farmville, jumped 81 per cent to $8bn in institutional trading. Groupon, a group discounts website, rose 19 per cent to $5.7bn.
Some companies declined in value, which is measured by median secondary bids for $10m in common shares auctioned over 30 days, times the estimated number of shares outstanding. Yelp, the user-generated service and restaurant guide, saw its valuation decline 5 per cent, to $466m. Digg, a social content aggregation website, declined 19 per cent to $83m.
As a group, the 12 social media companies tracked – which also includes LinkedIn and eHarmony – saw their valuations rise 51 per cent in institutional trading.
Notably, however, trading in those companies by individuals, which typically includes employees who are given the shares as part of their compensation, showed a smaller gain in valuation, a rise of 41 per cent.
“Some social media companies are making it more difficult for employees to sell, while negotiating capital raising deals with investors,” said Laurence Allen, chief executive of Nyppex.
Some companies are worried that employees could also be trading on inside information. Facebook, which has blocked employees from selling shares without authorisation, recently replaced an employee who was found to be particularly active in the market .
The difference in valuations also illustrates concern some investors have about private-share market, where difficulties in tracking who investors are, uneven liquidity, and possible intervention by the companies themselves mean that the valuations can be unreliable.
“There is a mania with these companies, and trading in volume is very expensive,” said Kevin Landis, a long-time tech investor and chief investment officer of SiVest Group. “But things are worth what people are willing to pay for them.”
Private secondary markets have grown sharply in recent years. Mr Allen estimated that secondary transaction volumes will be $6.9bn in 2011, versus $4.6bn in 2010. Private markets have seen new entrants, such as SecondMarket, Sharespost and Gate Technologies, which has added liquidity.
They have also boomed as companies like Facebook and Twitter delayed public issuances due to uncertain market conditions following the financial crisis, making them unusually large and mature companies that have remained private. That has drawn interest from large institutions, such as T. Rowe Price and Fidelity, and dedicated funds.
These markets have also come under scrutiny by regulators and companies. The Securities and Exchange Commission is reviewing its rules about how many investors a company can have before it must file public financial documents, fearing that too many investors are accessing the unregulated private market where disclosure is limited.
Goldman Sachs introduced a fund in Europe that owns Facebook shares, though it declined to invite US investors for fear that it could violate SEC rules about soliciting private shares.