Liquidnet in talks with investors

Online block-trading network Liquidnet is holding discussions with several potential buyers of a minority -- likely less than 15 percent -- stake in the five-year-old company, Institutional Investor has learned. A deal would allow early investors, including some Liquidnet executives, to cash in some of their shares. It would also establish a valuation for the fast-growing New York firm in advance of a potential initial public offering, though the company is still undecided about whether to pursue that route.

At least one of the bids submitted thus far, from Greenwich, Connecticut­based General Atlantic Partners, is believed to value Liquidnet at more than $1 billion, say people close to the process. General Atlantic, however, has no inside track on the investment. Several other private equity firms are interested, and a deal is unlikely to happen until at least midmonth. Liquidnet won't comment, and General Atlantic didn't return calls.

None of the proceeds from any sale would go to the company, which is highly profitable and doesn't need to raise capital. "This is a liquidity event for the early investors," explains one person who has been involved in the talks. "It's a chance for them to take a little bit of money off the table." Liquidnet's initial backers include TH Lee Putnam Ventures and renowned fund manager Michael Price, as well as a small number of its own executives.

Investment bankers are salivating at the prospect of an IPO for the company, which offers a Napster-like peer-to-peer network allowing traders for mutual funds and other big institutions to exchange giant blocks of stock anonymously. Based on its current average of 29 million shares traded daily at a fee of 2 cents per share over roughly 250 trading days a year, Liquidnet's annual revenue is probably about $145 million, not counting its smaller but growing European business. A $1 billion valuation, then, is equal to about 7 times annual revenue. In comparison, electronic exchange operator Archipelago Holdings, one of last year's hot financial technology IPOs, sports a market capitalization of $875 million, less than twice last year's $468 million in revenue. Liquidnet employs just 70 people in New York. Archipelago has a workforce of about 220.

But the way the minority sale would be structured, with no proceeds to the company and early investors cashing out, suggests that Liquidnet is in no hurry to go public. Iconoclastic founder and CEO Seth Merrin is already a rich man after selling an earlier start-up, order management system vendor Merrin Financial, to Automatic Data Processing in 1996. In the past the former Oppenheimer & Co. risk arbitrage trader has expressed mixed emotions about an IPO, saying that although he recognizes that other Liquidnet executives and investors deserve a chance to monetize their equity stakes, he also wants to maintain control of the company. Structuring this deal the right way -- potentially as a high-dividend-bearing private equity investment, according to one source -- may help him achieve both goals.