Private equity platforms: Matchmakers

Styled on popular game show Blind Date, the "investor selector" session at last year's AVCJ Forum - which saw one LP, seated behind a screen, put questions to three unnamed GPs and pick her favorite based on their answers - highlighted some of parallels between investment and courtship: the challenge of finding the right fit, making the decision to commit, and building a lasting relationship. 

Antoine Dréan takes the metaphor a step further when talking about his latest venture, Palico, which he describes as an online "dating service" for GP and LPs. Dréan, who previously founded and spent 22 years at placement agent Triago, set up Palico in 2012 in response to a couple of key developments in the asset class.

"When I first started out in private equity the question was who in world would invest in PE? The asset class was easier to understand and most GPs and LPs could be found in US," he explains. "Now it is the opposite; GPs and LPs are everywhere, they cover different formats and most of them don't know about each other or have a place to meet."

Dréan is not alone is seeing an opportunity for bringing a disparate global community together via the internet. Palico is but one of a number of private equity platforms to emerge in recent years, offering a set of tools that allow GPs and institutional investors a means of connecting outside of conventional channels.

Palico, and its competitors, already claim PE players are signing up to the idea. But some may still need to be convinced of the utility of these platforms and be made comfortable that they will not fall foul of regulators.

Online PE platforms are not a new concept. DealMarket, for example, has been around since 2011. While the platform does not focus on fundraising - instead specializing in direct investment opportunities and equity fundraising - it has helped set a precedent for a new way of conducting business.

Urs Haeusler, CEO of Deal Market, claims the move towards online platforms has been long overdue for private equity. "We see in almost every industry the internet has brought transparency and efficiency via online platforms, whether its real estate or dating," he says. "The PE and VC market is still very opaque and inefficient in a way - we wanted to create an one-stop shop that can bring together investors, sellers and service providers on the sell side and buy side."

Over the last two years, in addition to Palico, UK- headquartered research firm Preqin has launched Preqin Investor Network, while iCapitalNetwork and Bison - which operate along similar lines - have been set up in the US.

Regulatory wrangles

But GPs are wary of jumping in feet-first. Perhaps the chief concern among industry participants are rules over general solicitation. If a GP approaches an LP via an online platform would it fall foul of the regulators?

To a degree, this has already been addressed. The US Jumpstart Our Business Startups (JOBS) Act - signed into law in April last year - included an amendment to Rule 506 of Regulation D under the Securities Act. This removed the prohibition on general solicitation and general advertising in certain private placements.

However, participants in these offerings must still be accredited investors according to the Securities and Exchange Commission (SEC) definition, and a greater burden is placed on the issuer to verify that these investors are indeed accredited. The potential issues do not stop there.

"The problem is that investors are scattered across the world. There are various registrations and regulations, and we are seeing this clearly with Europe - with Alternative Investment Fund Managers Directive (AIFMD) - as well as in countries like Japan and Korea," says Albert Cho, a Hong Kong-based partner with law firm Weil. "Unless a platform is being regulated, has coverage globally and is registered in every single jurisdiction, it is hard to get comfortable."

AIFMD is one of several measures introduced by the European Markets and Securities Authority in the past year, which require GPs marketing funds within the EU meet certain standards on transparency, capital adequacy, remuneration and delegation restrictions, risk and valuations.

Japan and Korea are known for having strict rules that preclude unregistered investors from qualifying for the private placement exemption that allows them to solicit domestic GPs, but the likes of Hong Kong and Singapore also have well-established regulatory regimes.

Palico has sought to tackle these concerns head on. It claims to be the first electronic platform approved for a broker-dealer license and the first to be regulated in the EU by France's Autorite des Marches Financieres. Meanwhile, Palico's US affiliate is a member of the Financial Investor Regulatory Authority (FINRA).

Currently, the platform allows LPs to conduct anonymous searches for GPs and even bid on or list secondary stakes. GPs can offer information about their firms, fundraising plans and road shows, as well as follow up on those leads, if an LP decides to reveal itself.

Other platforms entering the market have sought to avoid general solicitation obstacles altogether by keeping the process passive on the GP side. Preqin treats its Investor Network as an extension of its pre-existing research database.

"The beauty of the service is that the fund manager will be passive and cannot see who is looking at its information," says Stuart Taylor, head of investor products at Preqin. Six thousand accredited investors will have access to general information on GPs, and then can use the platform to ask a fund manager to disclose further details if they want to take a closer look.

"Simply put, it is the investors that have the power so there are no concerns whatsoever about solicitation on the manager side," he adds.

Information nexus

Some industry participants stress that it is the ability to access and share additional information that will be key in differentiating platforms. This is particularly the case when some GPs are reluctant or unable to actively reach out to LPs.

"There have been platforms in the past that have not worked because the quality of information has not been accurate, so people have tended to stick to meetings and email rather than use any kind of social network,' says Guarav Ahuja, a director with of Indian private equity firm ChrysCapital, who has been exploring possible uses for platforms. "But there is a space for it and, if it is done well, it can be a great utility."
Whether the platforms will evolve into something more - as a place where GPs and LPs can actually transact as opposed to just exchanging information - remains to be seen.

There will always be several filters and techniques that can be used to access institutional investors, including conferences, advisors and the phonebook. However, as one placement agent notes, LPs still require assistance in identifying what is missing in their portfolio, understanding where they can find it, and building a research database to work from.

The chances of online platforms fulfilling this role to the point of performing transaction functions largely depends on how the regulatory environment evolves and on the industry's willingness to adopt new the norms.

Palico's Dréan does not rule it out but he expects it to take a while. In the meantime, the transparency and convenience brought by private equity platforms can complement traditional methods of private placement. "I don't see online transactions happening in the short to medium term," he says. "Private equity is still about human beings - it is more art than science - but the potential is there."

The success of these platforms ultimately rests on how many people actually adopt the service. With thousands of investors already signed up, some claim they are close to building a sustainable online community.

For Preqin, this process has been eased by drawing upon existing users of its data services. "We are leveraging what we have been doing for years really, so the network is the next step for us, rather than a starting point," says Taylor. "It is a new service, but we hope it will become the default platform for the industry."

Needless to say, everyone else has the same ambition and with multiple platforms ultimately targeting a similar pool of investors there will be winners and losers. Indeed, some firms may wait and see which platform emerges as the industry standard before committing.

"The biggest challenge is the speed at which the market can adopt this kind of tool," says Dréan, "It's a volume game, it is about reaching critical mass and we are getting there."

Only then will be know if these platforms can establish themselves as an essential tool for GPs and LPs looking for their perfect match.

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