Curious about Secondary Markets?
November 18, 2016 | by Beth Glavosek | Blue Vault
One of the aspects of nontraded investments that investors must understand is the issue of illiquidity. That is, the intention of most nontraded programs is that investors will commit their money to the long-term and be able to give up access to their funds temporarily in exchange for a potential pay-off when the investment goes full-cycle.
However, there certainly can be cases in which stockholders wish to sell their shares prior to the conclusion of an investment program. While most nontraded REITs have share redemption programs, these programs may have been suspended due to liquidity issues or restricted to redemption requests filed due to death, disability or other hardships. One alternative to share redemption programs is to sell shares on what’s known as the secondary market.
One outlet that has emerged to offer nontraded REIT shareholders a more competitive market for their shares before a full-cycle event is consummated is the “online auction” website. These sites provide a forum for matching buyers and sellers of nontraded REIT (NTR) shares. In an earlier Insights article, Blue Vault listed more details about this concept and contact information for several of these sites that are available to meet this need.
However, there are some points that advisors and investors may wish to understand before they embark down this path. Here are some common questions and answers.
Q: What should investors know about secondary markets for nontraded products?
A: There are transaction costs involved, usually as a percentage of the transactions. Also, buyers have to qualify just like they would if they were buying NTR shares from a Broker-Dealer; therefore, minimum net worth, income requirements, and portfolio concentration limits apply.
Q: What is the downside of picking up shares on the secondary markets at a price below current offering price vs. buying the shares from the sponsor?
A: One downside would be that the shares at the auction sites are offered in “lots” or a specific number of shares. That is, if an investor wants to invest $10,000 or $100,000 in a specific product, there may not be any transactions available because one lot could be for $25,000 worth of shares (approximately) and another is for $11,000 worth of shares, and none of the auctions available match the desired investment amount.
Another downside is the limited availability of NTR shares. Usually, even the most active auction sites have only five or six different NTR share lots available at a time from only five or six NTRs. Those that are most available can be REITs that either have had negative performance over time or are approaching liquidity events, so they are not going to be “long-term” investments. These aspects eliminate most investors from being interested and make these auction markets more open to speculation. Participants are hoping to capture a shorter-term gain by buying low and receiving a capital gain when the liquidity events hopefully materialize.
One of the reasons that more advisors don’t recommend secondary market shares for clients is that these markets do not meet the objectives of long-term investors looking for steady income.
For more information about secondary markets, check out Blue Vault’s Insight articles, exclusively for Subscribers.