As first reported last week at LeapRate, Edison Partners confirmed today that it has completed the distribution of its entire holding of GAIN Capital (NYSE:GCAP) shares to its limited partners. The firm was one of GAIN Capital’s original investors. Edison invested approximately $3.5 million in 2001. GAIN successfully completed its IPO in 2010. Edison’s investment in GAIN produced a 17x return.
Why did Edison exit its GAIN stake this way, instead of selling the shares?
It is not uncommon at all for VC funds to dispose of shares in this fashion. It is often more tax efficient than selling the shares. If a VC firm were to sell the shares that would trigger capital gains taxes for the VC fund itself. They would then distribute the after-tax proceeds to their limited partner investors in the fund – who then themselves might have to pay capital gains taxes.
And given that some LPs are tax exempt or have low tax rate status to begin with (such as University endowment funds and certain pension funds), it is more tax efficient for VCs to distribute the publicly traded shares of a successful investment and let their LP investors handle the sale of the shares themselves, paying low or even no capital gains tax.
GAIN Capital has gone from strength to strength recently, having completed substantial increases in its economies of scale, most notably its recent purchase of long-established British spread betting firm City Index for $118 million. The company is one of the largest and most prominent electronic trading enterprises worldwide in both the retail and institutional sector, providing liquidity, technology, and trading support to individual and institutional clients worldwide. The company supports more than 12,500 OTC and exchange traded markets, averaging $595 billion in monthly transaction volume through more than 130,000 retail trading customers in 180 countries.
“It has been an honor to back the founders and management team with the foresight to create and attack an entirely new market in online trading,” said Chris Sugden, Managing Partner, Edison Partners, and GAIN Capital board member. “Glenn Stevens and the management team have successfully built one of the largest global online trading firms over our investment period and continue to effectively execute their strategic vision to further expand GAIN’s geographic footprint and product offering.”
“Chris is a hands-on board member and contributor. His operating experience, industry knowledge, and network have been invaluable to GAIN,” said Glenn Stevens, President and CEO, GAIN Capital. “Edison has been a true partner, offering actionable strategic advice and guidance at every step of GAIN’s journey from startup to becoming a successful publicly traded company.”
Edison Partners’ formal announcement on exiting GAIN Capital can be seen here.