Private Pa. Bank Finds a Market for Illiquid Shares

Shareholders in a privately held bank generally have two options for cashing out of their investment — wait for the bank to go public or hope that it sells to a larger institution.

But what's an investor to do if the bank has little interest in doing either?

At Team Capital Bank in Bethlehem, Pa., the answer was to partner with a broker-dealer that makes markets in illiquid stocks to help it match interested sellers with willing buyers. Since June its investors have sold more than 100,000 shares in two separate stock sales, and Team Capital's Chief Executive Robert Rupel says he expects to hold similar auctions three or four times a year.

"We don't have any immediate plans to go public, but at the same time we want create liquidity for our shareholders," Rupel said.

Team Capital is working with SecondMarket, a New York broker-dealer that specializes in alternative investments. Better known for making markets in shares of privately held technology companies — it worked with Facebook before it went public — SecondMarket launched a pilot program for community banks earlier this year and has so far run auctions for a handful of banks.

Banks are a natural market for its service because there are some 6,000 community banks in the country and most of them will never go public, Caryn Feinberg, a senior vice president at SecondMarket. Most also have local investors who at some point will be looking to cash out to pay for a child's education, or to purchase a second home or simply for estate-planning purposes.

"Investors want to know, 'how am I going to get out if I get in?'" Feinberg said.

Investors in privately held banks can sell their shares without the help of a broker-dealer, but it can be a cumbersome process. Rupel said that until he teamed up with SecondMarket, investors would typically call him and ask if he knew of any willing buyers and that it could sometimes take weeks or months for one to emerge. Also, because bank executives are barred from brokering such deals, the buyer and seller would have to determine a sale price themselves.

"It wasn't a very efficient process," Rupel said.

Now, SecondMarket does the bulk of the heavy lifting, from notifying investors of the planned auctions to setting the market price to executing the trades. It can also supply banks with a ready-made list of accredited investors.

SecondMarket's community bank program is still in its pilot phase, though the broker-dealer is considering rolling it out nationwide.

SecondMarket charges banks an annual fee of $30,000 and also collects a fee on each trade it executes, Feinberg said.

While that may be too steep a price for some banks, for Team Capital it beats the cost of going public while accomplishing some of the same goals.

"Our biggest goal is to create visibility for the bank," Rupel said. "If we can attract a wide spectrum of people to become interested in [investing], that's certainly in our best interests."