October 13, 2013 1:23 pm

Hedge funds shun marketing route after lifting of ban

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Hedge funds and private equity groups have not flocked to market their businesses to wealthy individuals, despite the lifting of a long-time ban on advertising to US investors.

The 2012 Jobs Act lifted the decades-old ban on the “general solicitation” of investors by private companies and illiquid investment funds, and new rules came into force on September 23

Supporters of the reforms say they will bring additional transparency to what are currently opaque areas of finance and ultimately make it easier for entrepreneurs to raise money.

But while ff Venture Capital, a small New York VC group, last week became the first to publicly advertise for backers and other upstart companies say they will follow suit, bigger players are planning to stick to their traditional private fundraising networks – at least for the time being.

Advisers to major hedge funds say that advertising a fundraising could be interpreted as a signal a firm is having difficulty attracting capital, and funds are therefore unlikely to take advantage of the new rules.

The partner of one West Coast venture capital group said it had discussed the possibility of advertising, but had come down against.

“The Goliaths in our industry are not going to advertise,” agreed Anthony Scaramucci, founder of SkyBridge Capital, a hedge fund of funds. “They think it is gauche and déclassé, and their partners already have their private planes and their beachside mansions in the Hamptons, so why disrupt the business model?”

SkyBridge, which has $8.6bn under management, does plan to advertise, however.

“It presents an opportunity for the Davids to come in with their slingshot, and we are working on our messaging right now. If you choose the right weaponry, you can take out Goliath,” said Mr Scaramucci.

Even under the new rules, permission to take part in a fundraising will still be restricted to wealthier investors, but there are now fewer restrictions on firms advertising, publicising financial details and discussing returns.

Last Friday, ff Venture Capital became the first private equity group to take advantage of the new rules to publicly solicit investors for a new $50m-$70m fund. It has raised more than half the money privately already, though founding partner John Frankel said it had taken a year to do so.

“It is the kind of one-to-one marketing they had in the late 16th century in the Lloyd’s coffee shops when they were underwriting ships,” he said of private money raising. The Jobs Act should usher in a more modern and transparent system, he added.

“Why shouldn’t I be able to tell a room of people, or tell the Financial Times for that matter, that we are raising capital?”

The Securities and Exchange Commission, whose staff opposed many aspects of the Jobs Act, insists that hedge funds, private equity groups and companies soliciting capital must raise it only from “accredited investors”, who are those who earn more than $200,000 a year, or who have assets of $1m or more, excluding their homes.

Additional reporting by Richard Waters in San Francisco.

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