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Buying shares in private companies accelerates

Private and institutional investors are increasingly investing in private companies as a way of diversifying their portfolios at a time when public markets are delivering poor performance.

High profile deals include Russian internet entrepreneur Yuri Milner's $200 million investment for 2% of social networking phenomenon Facebook. Milner has also bought shares in internet companies Zynga and Groupon.

Although such investing has taken place before through private equity deals, companies or their founders provided most of the shares. But now employees and investors are selling their shares in well- known private companies like Facebook, Twitter, Linkedin and Zynga.

Smaller private companies are also seeing demand for their shares as many firms delay initial public offerings because of weak markets and the higher costs associated with being a public company since the 2002 Sarbanes-Oxley Act in the US.

Estimates of the size of the market are difficult to quantify given that stock sales do not have to be reported. But Nyppex, a New York-based advisory company, estimates that nearly $2.5 billion of such stock traded hands in the US last year.

European and Asian investors are also getting in on the act, buying shares in the US, as well as in Israeli and Chinese tech companies.

But the trend is likely to have its limits because of the fact that once a company in the US has 500 or more shareholders, the US Securities and Exchange Commission requires the disclosure of significant financial information. 

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