It would be rare to find a sell-side banker that hasn't engaged in a private placement. A private placement is simply an offering made to select parties and does not require registration with the SEC. These can come in the form of RegD 504, 505, 506 or 147, for example. The benefits are apparent; no need for public registration, lower hurdles for disclosed information, and--normally--the waiver of a prospectus that can be costly and timely especially if 3rd party legal eagles get involved. The drawbacks are few, but we will focus on a particularly challenging drawback. Placing the deal.
Larger firms (bulge-bracket) normally have a pool of investors that they can tap for these types of transactions. Qualified institutional buyers (QIBs) and high net worth individuals (HNWIs). Smaller firms (boutiques), however, can have issues placing as they do not have the established network. Further boutiques play in the same sandbox as the bulge-brackets. Meaning, boutiques show product to the same investors as bulge-brackets and occasionally compete for clients. Investors are more inclined to go with the larger firms due to reputation and to maintain goodwill. Another problem is smaller firms do not have the bandwidth to do primaries and secondaries, and mostly focus on niche M&A. Even then, boutiques don't have the balance sheet to withstand a firm commitment and typically act on a best efforts basis. All these factors can scare off clients. The investment banking industry is saturated and fees are dropping. Boutiques need a better way of reaching new investors and corporate clients. Information technology can assist.
Solutions or more noise? Sites like Axial.net provide a platform for members to post deals and review deals. Ideally, a banker will upload a transaction and an investor will see it, pursue the deal, and then get connected with the banker. This--in theory--allows the banker to cast a wider net on the distribution end and test the market for investor interest. What could end up happening, however, is unlicensed business brokers dilute the market place with deals that they may--or may not--have mandate to represent. Brokers may end up pursuing other brokers' deals. Such 'broker chains' could scare investors away from the platform. Instead of offering a platform for boutiques to get noticed, the site may become overrun with brokers.
How can information and communications technology help private placements? Like public markets, the more information available, the more efficient the market becomes and investors dictate the price. Online platforms to post securities deals seem to be the next logical step in the sell-side space. If a group can create a platform where securities deals are offered through auction, then I believe that platform will be incredibly valuable. Such a platform could take a % of each deal for providing the service. Such platform will most likely have to be a registered broker/dealer and subject to FINRA/SIPC/SEC as the platform will be offering securities to investors and creating markets (Regulation M as firm will be a market maker). On the positive end, the platform could require only registered firms/individuals have access to such tools. Investors would have to prove that they are QIBs or HNWIs to join. This could streamline deal flow and create a new digital market for privates.
The hurdles appear to be mainly regulatory. Would be hard to monitor a private--yet public--type market. Would broker/dealers still have protection from RegD/144a/147/etc. or would securities have to be registered, thereby handicapping some of the benefits to these transactions? Would investors demand more information on deals before bidding? How do you limit saturation of the market by brokers? What if the broker is working on best efforts and only half the deal gets placed? If a platform can wrap their head's around the front-office capital markets distribution end and handle the back office compliance, then they may have a handle on a new market for initial private offerings over electronic networks.
Nile C.
4/9/14 8:38pmEST
The hurdles appear to be mainly regulatory. Would be hard to monitor a private--yet public--type market. Would broker/dealers still have protection from RegD/144a/147/etc. or would securities have to be registered, thereby handicapping some of the benefits to these transactions? Would investors demand more information on deals before bidding? How do you limit saturation of the market by brokers? What if the broker is working on best efforts and only half the deal gets placed? If a platform can wrap their head's around the front-office capital markets distribution end and handle the back office compliance, then they may have a handle on a new market for initial private offerings over electronic networks.
Nile C.
4/9/14 8:38pmEST
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