Private Equity’s Online Courtship

FOR decades, private equity firms relied on highly paid middlemen to raise money. But soon, the process may be as simple as logging on to a website.

In an effort to change the way the notoriously secretive industry finds investors, several start-ups are pitching online matchmaking services to the world’s biggest private equity players.

The task is daunting. Ever since the industry found its footing in the 1980s, private equity firms have relied on placement agents â€" essentially, middlemen â€" to find investors and raise billions of dollars for buyout funds, collecting large fees. The placement agents have become a powerful force, controlling access to the top funds.

Start-up companies are eager to capture a share of the business by connecting investors directly to funds. The efforts come on the heels of a rule change that took effect in September, when the Securities and Exchange Commission relaxed an 80-year-old ban on advertising by private funds.

Now hedge funds and venture capital and private equity funds can let the public know they are looking for money, though they are still allowed to accept money only from those who are financially suited for such alternative investments.

These sectors have been a bit slow in taking advantage of the new rule, which stems from the Jump-Start Our Business Start-ups Act, or the JOBS Act. One small firm in New York, FF Venture Capital, took the plunge in October by announcing that it was raising a fund, seeking $50 million, but it is the only such firm to do so.

“No fund manager is going to want to put something on the Goodyear Blimp or billboards,” said Jeff Berman, a partner at the law firm Clifford Chance. “They are looking for highly sophisticated investors who value discretion â€" and people who have the wherewithal to honor the commitments they make.”

Many of the matchmaking services are so new that potential client firms have not had a chance to see how effective they are. Several of the entrepreneurs in the matchmaking game are working with traditional placement agents, rather than in direct competition with them.

One of these start-ups, iCapital Network, which is planning to release a private test version to certain clients this month, has backing from some top placement agents, including Eaton Partners and a group at Credit Suisse. For a subscription of $12,000 to $100,000 a year, private equity firms will be able to list confidential information about their funds on the platform â€" including marketing documents and performance data â€" for prospective investors to browse.

The Credit Suisse group, which has helped raise more than $400 billion for clients since its founding in 1994, has a 30 percent stake in iCapital, said Dan Vene, the firm’s chief executive.

“We can’t replicate the 70 people working the phones for you,” said Mr. Vene, who formerly worked at Eaton Partners and the investment firm Fir Tree Partners. “But what we can do is come up with innovative ways to tell your story.”

And with the rapid growth of private equity, there could be plenty of opportunities. As of January, 1,949 private equity funds globally were seeking capital from investors, compared with 1,845 the previous year, according to data from Preqin, a financial information provider.

As these services grow, they could bring potential new clients to private equity, said Michael P. Harrell, co-chairman of the private equity group at the law firm Debevoise & Plimpton.

“These online platforms could reach out and pool all kinds of individual investors to invest in private equity funds that historically wouldn’t have bothered with large numbers of small investors,” Mr. Harrell said.

The sites say they vet investors to make sure they are “accredited,” by the S.E.C.’s definition, to remove a potential chore for the private equity firms. But even if individual investors meet the definition of accredited â€" with a net worth of more than $1 million or annual income above $200,000 â€" private equity still might not be appropriate for them, said J. Robert Brown Jr., a professor at the University of Denver’s law school.

“They use dollar amounts as a substitute for sophistication,” said Mr. Brown, who serves as secretary of the S.E.C.’s investor advisory committee, a group created under the Dodd-Frank overhaul. “There will be firms out there that are less than reputable that use this as a way of sweeping in funds from people that are not particularly sophisticated.”

Companies that serve the private equity industry see online matchmaking as lucrative.

Even Preqin, based in London, sees potential in the sector. It has signed up more than 100 fund managers and more than 3,000 institutional investors for a platform that started in a test version this month, charging the managers a subscription fee but providing complementary access to investors, according to Tim Friedman, who oversees the firm’s United States operations.

Another service, Palico, with offices in London, Paris and New York, has been operational since May of last year, with about 1,300 members. Big sovereign wealth funds and pension funds, including the California Public Employees’ Retirement System, use the platform to find private equity opportunities they might otherwise have overlooked.

The trick for firms in the budding sector may be to distinguish themselves from placement agents without alienating them.

Though iCapital works closely with placement agents, it is also planning a placement agent service of its own â€" for smaller investors, Mr. Vene said.

Those investors would be too small to fall under the purview of a large placement agent, Mr. Vene said.

“This doesn’t cannibalize our core business. I think it can be additive,” said John C. Robertshaw, co-head of the private fund group at Credit Suisse, which is invested in iCapital. “It’s going to create, we think, significantly more efficiencies.”

Palico, too, emphasizes that it offers a different service.

“At the end of the day,” said Antoine Dréan, the company’s founder, “Palico is more like a dating service.”