The following interview (by Alicia Purdy) originally appeared on Accredited Investor Markets (AIMkts) and can be found at http://www.accreditedinvestormarkets.com/a-few-minutes-with-ace-portal.
1. What sort of gap/need in the private investment market spurred the inspiration for ACE Portal?
Peter Williams (PW): The initial basis for ACE Portal was born from practical experience. Having worked in investment banking for close to a decade I was pulled into numerous private placement processes and was amazed at the inefficiencies in that process. On the investment banking side the process is very labor intensive, with most investor interactions recorded manually. Investor reach was highly limited and literally relied on a couple of guys and a telephone as the state of the art way to reach the investment community. While there are over 30,000 qualified institutional buyers in the US alone, collectively we, the bankers, would determine which 25-75 investors would be the only ones to even know about the specific transaction we were marketing. This took months and often resulted in failed transactions. Ultimately I thought there had to be a better way to bring efficiency to this market, to increase transaction speed and success rates, all in a fully compliant manner.
Carl Torrillo (CT): For me, the inspiration is about democratizing access to capital for deserving companies and in turn democratizing access to deal flow for investors, which I believe ultimately helps stimulate growth in the economy. The catalystfor me to leave my profession and join forces with Peter and Rich was the passage of the JOBS act. This created the practical opportunity to address the grand vision of streamlining a tremendous (~$1 trillion) market.
Richard Pistilli (RP): What I found in the private investment market was a common structural impediment towards streamlining processes which was driven by antiquated systems and aversion to change. The challenge to introduce efficiencies through innovation resonated with me, and it’s what I saw in ACE. The private capital markets are in need of structural solutions that can transform the asset class, which can then enhance capital flows and accelerate economic growth.
2. Can an issuer use ACE Portal’s back end technology to manage a raise even if it doesn’t want to use ACE Portal with the marketing function?
CT: Not directly, no…but through a registered broker-dealer, yes. Let me explain that in a bit more detail. ACE only works with registered broker dealers, so we would not allow an issuer to directly access ACE’s tools for managing a transaction. That said, if the issuer has engaged a placement agent to manage the transaction, the placement agent can access ACE’s tools on behalf of the issuer to manage the process through what we’ve termed our ‘invite only’ offering. This essentially allows the placement agent to utilize ACE’s full suite of communication management tools, along with the integrated data room and book builder to seamlessly manage their process to a closed community of investors.
3. What else makes ACE Portal different from crowdfunding platforms limited to accredited investors?
CT: Let me preface this all by saying point blank that we are very different from crowdfunding. Now with that out of the way, when you ask about crowdfunding, exactly what are you referring to? Are we talking about true investments or are we talking about pledges to help a company get off the ground (where maybe you get a sample product as a reward)? Are we talking about offerings that comply with Title III of the JOBS act (a $1mm maximum raise in any 12 month period)? I ask all these questions because it’s really hard to define crowdfunding. So I tend to explain what we do rather than try to contrast our business against a term that I find has a different meaning for just about everyone you talk to.
We operate strictly as the backbone for institutional private placements; meaning we provide a technology solution that investment banks can use to market their deals more effectively to a broader community of investors in a time efficient manner. On the flip side, we provide investors with a one-stop-shop for seeking out and evaluating investment opportunities that fit their criteria across a spectrum of industries and security types.
PW: We benefit from similar technology enhancements to make capital formation more efficient, but we are targeted toward the existing institutional-focused marketplace.
4. Any plans to allow non-accredited investors invest through Title III?
PW: No. ACE targets larger private offerings, and currently has an average deal size north of $50 million. Title III of the JOBS Act limits capital raised in any 12 month period to $1 million. So, that’s a very different market.
CT: To add to that, we believe this is sensible given the risks inherent in private securities where transparency and liquidity are limited and there is increased potential for information gaps between buyers and sellers as compared to the public market. This makes conducting due diligence challenging, and it often requires professional assistance even for accredited investors and large scale institutions. That said, we are very much in favor of finding ways for non-accredited investors to participate in the returns that private securities offer. Over time for example, we could see funds established that provide for a certain percentage of holdings in illiquid securities.
5. In what ways has ACE Portal improved/modernized the private placement process and why should that matter to an accredited investor?
RP: ACE introduces efficient technology to an antiquated and opaque marketplace. For investors, this means the arrival of a centralized IT forum for navigating private investment opportunities. The platform has the potential to revolutionize investor access and introduce a level of transparency to the market that’s never been achieved before.
CT: ACE has taken a very labor intensive process and automated it. For accredited investors, the overarching goal of our platform is to provide enhanced access to deal flow. With ACE, for the first time, investors can seek out institutional private capital raises that meet their specific objectives, all in a confidential manner.
PW: While the accredited investor universe is large, access to it has been highly limited with agents targeting only a small group of large investors who can write big checks to get deals done. Through ACE, mid-sized institutions, family offices and ultra-high net worth individuals, and retail accredited investors will have access to transactions that they never would have previously.
6. Peter, as someone who spent time raising capital for issues the pen-and-paper/phone call way, what gaps existed that ACE Portal is closing?
PW: There are really two key areas. First, it is very difficult and highly unreliable to keep track of processes manually. People are literally tracking who called who, who got a teaser, who was provided documents, all via excel… In addition, many things, such as investor attestations and non-trading attestations are done over the phone, which is highly unreliable. So, the first major gap we cover is providing tools for process and compliance management. The second major area is investor reach.
In the current, manual, one-to-one process, investor reach is limited from a practical perspective to maybe 100 investors, at best. With ACE, agents now have the option and ability to reach and interact with potentially thousands of investors as easily as they would communicate with say 50 using their current processes. This allows them to get more deals completed in a shorter period of time.
7. How does Title II, the lifting of the ban on general solicitation, change what ACE Portal is doing?
RP: Lifting the ban will increase investor access, which, in my opinion, also increases the need for financial professionals to act as intermediaries. More investors looking at more investment opportunities requires a heightened standard of diligence and process. Investors will need to be able to discern the different merits and risks of these opportunities, and the best way to do that is through the aid of a financial professional.
CT: It will be interesting to observe the practical implementation of Title II by industry participants. For our part, we are building into our software the ability for placement agents to market their deals in accordance with “506(c)” — the new exemption under Reg. D which provides for general solicitation. Practically, what this means is that an issuer’s name and more detailed business description can appear much earlier in the process than under a traditional raise. It has also opened the door for us to send emails notifying investors (those who opt into receiving such updates) of relevant transactions. At ACE, we believe agents and issuers will be using this exemption to cast wider nets through traditional channels
PW: Carl’s point is an important one. Title II provides issuers and agents the right, but not the obligation, to reach out to investors with whom they do not have a substantive pre-existing relationship. I think most issuers will still opt to run confidential processes but with broader reach through the use of technology. ACE is perfect for that, as we provide the agent with the functionality to choose from along the spectrum of how open or confidential that process is.
8. Regarding funds, does ACE Portal facilitate the trading of LP interests between investors as well as helping funds do capital raises? In other words, is ACE Portal a secondary market as well?
CT: ACE can certainly facilitate secondary market transactions, but our current product only contemplates secondary transactions that involve an intermediary placement agent. In other words, we are well equipped to support large scale secondary LP transactions.
PW: Actually, we do help funds raise capital, but that is a primary issue, not a secondary one. With regards to secondary transactions, whether for a fund or corporate issuer, ACE’s view is that investors need information to be able to make informed investment decisions. The private markets are more opaque than the public markets. As a result, all investors may not have access to the same information. Therefore we don’t really believe that true “trading” will develop significantly. We believe that secondary transaction should be what we would call “marketed” deals whereby an agent is involved and investment materials are prepared for those new investors. In that context yes, we are active in both primary and secondary transactions.
9. What diligence do you do on a company or fund before you allow it to list on ACE Portal? Are there certain minimum objective metrics a placement agent must have before ACE Portal will list it?
PW: Our goal for ACE is to be the highly respected platform for larger, institutionally-focused private security offerings. We do that by working only with respected investment banks and placements agents that operate in this space. It is not our place to advise those investment banks on their transactions, but we have turned away numerous agents that have sought to register on our platform for these reputational reasons.
CT: So basically ACE focuses its diligence efforts on vetting the quality of placement agents that we allow to post deals to the site. We are not in the practice of evaluating the specific deals that are listed, as that is the job of the agent who is placing the deal. We do some high level work to ensure that no red flags are raised. Beyond that, ACE’s deal minimums and minimum upfront fee, combined with the agent’s own reputational concerns serve to organically curate the investment opportunities.
10. Investing and vetting deals can be overwhelming and labor-intensive for an individual accredited investor – what does ACE Portal provide to take the pressure off?
CT: We agree. Conducting proper investment due diligence is challenging, and it often requires professional assistance. We would encourage individual investors to work with financial professionals to properly evaluate participation on a deal by deal basis. We are currently working on vetting a network of very reputable institutions who conduct professional, institutional quality diligence. By aggregating individual demand through the portal, our goal is to make this institutional level of research available to individuals.
PW: That’s a very good point and to be blunt, direct private investing is not for everybody. This is part of the reason the market has been so focused on institutions. As Carl noted, working with an advisor or registered investment adviser is a great start. We also expect that funds will be created to allow for individual investors to get access to a broader diversified portfolio of private securities, run by a professional investment team.
RP: For the first time, investors can use ACE to look at deals across broker/dealers. This improves transparency and enables investors to benchmark deal terms, and comparables. In addition, ACE will be introducing 3rd party service providers that can assist in vetting deals.
11. Will ACE Portal put a lot traditional broker-dealers out of business?
PW: Absolutely not. Our business plan relies entirely on broker dealers running the private placement process. We are an independent technology provider specifically for broker dealers. We do not and will not allow an issuer to use ACE to go direct to investors for marketing their offering, so we will not disintermediate the incumbent broker dealers. Our job is to make their business more efficient.
CT: We certainly don’t think so. In fact, our goal is to make it easier for placement agents to take on the incremental deal that they might otherwise pass on. If we can provide a captive pool of demand that can be tapped into by placement agents on a consistent basis, they should be willing to take on a deal that might be below their more traditional transaction size. In that matter, we think that a number of great ideas will end up funded that might have otherwise fallen through the cracks.
RP: Private securities possess an intrinsic information gap. Basically, sellers are in control of what information they share with buyers. This makes conducting proper investment due diligence challenging, and often requires professional assistance.
12. Peter, during your banking career, you successfully raised over $13 billion in capital for a diverse group of companies, across multiple industries – what makes a startup, in your experience, fail versus succeed?
PW: That’s a very difficult question. Also, I should point out that most of the companies I worked with in my banking career were not start-ups, but rather larger $100 million plus businesses. To your question, there really is no one thing – there’s so much that can be attributed to being in the right place at the right time, having a great team, having a good business plan, being focused on a large market, luck etc.
Regardless of whether you attribute the success to luck or skill, in the end it’s about providing something that users want and/or need better than anyone else. What makes something “better” will be defined by the industry and targeted user base. In the long-run, however, success will be driven not by the short term “better” but by competitive advantage, as competitors will copy and commoditize what was once considered “better” if they can. Being first to market, in and of itself, isn’t competitive advantage unless you are building a marketplace, with a network effect where the switching costs become high, for instance. Ultimately, however, you can have a great idea but if you don’t have a good team to execute you’ll never succeed.
13. At what stage in the development of a company do ACE Portal investors come into an opportunity?
CT: It really runs the gamut. We’ve already had a variety of flavors of deals hosted on the site. Opportunities have included early stage, small scale equity raises–where the proceeds represent the initial institutional capital needed to really get someone’s great idea off the ground, sizeable debt raises that support the ongoing operations of larger scale private companies, and LP interests in both new and existing funds. That’s the great part about our business model. It is scalable across industries, agnostic to where a company is in its life cycle, and open to multiple capital raising formats.
PW: To date, the average deal size posted on Ace has been north of $50 million.
14. Are banks still using the “three guys and a telephone” approach to raising capital in the private placement market? Why?
CT: Yes, absolutely. I would say that’s evolved to three guys, a telephone and maybe an excel spreadsheet, but there has definitely not been a sea change in the deal making process…Of course we hope to change that. I would say we haven’t seen a faster evolution as a result of two primary reasons: (i) regulations have historically limited the implementation of technologies that served to broaden the reach of a private offering and (ii) inertia—resistance to change for the sake of resistance. So now that the regulatory environment has shifted a bit, we need to overcome the natural inertia that exists within banks around adopting something (anything) new. The good news is that inertia works both ways, so I think as we continue to win over investment banks, many others will follow at an accelerated pace.
RP: Our biggest competitor today is definitely inertia. Changing behavior takes a lot of time and effort, but it also has the greatest potential to impact the market.
15. What process did investors have to go through to find private placement deals before ACE Portal?
CT: They really had to be part of the “in crowd” to participate. If you were not receiving calls from investment banks marketing these kinds of deals, they were very hard to find. As an investor, you had to essentially call your relationships on the sell side (banks who are marketing deals), hope you get put in touch with the right person on the desk (i.e. someone who could put you on a list of interested parties for private placements), provide your investment criteria and then cross your fingers and hope that the bank (i) remembered who you are, (ii) remembered what you are interested in and (iii) showed you some of their high quality deal flow. Pretty inefficient if you aren’t already on the inside.
RP: Some investors will receive many opportunities, and some will not even receive a return phone call. The entire process is riddled with inefficiencies and lost opportunities. Given all the technological advances made in most other industries and the trillion dollar size of this asset class, this inefficiency is quite remarkable.
PW: The only thing I would add to that is that they had to have a big check book. As discussed, the agents need to hit the most likely investors that can take down big portions of the capital raise in order for them to be successful reaching out to only 25-50 investors. Mid-sized investment firms had great difficulty getting access to the “hot” deals as a result, and would only be contacted on deals that were struggling. For a retail accredited investor, access was next to impossible.
16. Why is it important that private placement professionals still be part of the ACE Portal process?
CT: We believe that financial professionals play an incredibly important role given the risks inherent in private securities. What are these risks?
First, with a more limited degree of formal oversight as compared to the public markets, transparency is more limited, and there is increased potential for information gaps between buyers and sellers. This makes conducting proper investment due diligence challenging, and it often requires professional assistance. Second, private securities do not trade openly in a large secondary market. This means that investors are unable to look to the market for price discovery and have limited liquidity available to them should they choose to sell their private securities. Finally, private securities are not sold through a centralized market infrastructure. As a result, it is difficult for investors to compare pricing and other deal terms across different offerings. All of these reasons favor including private placement professionals in the ACE community.
PW: I’d add that agents are set-up to source transactions, are required to conduct diligence on these companies and prepare marketing materials to bring them to market, as well as target the investor outreach. On its own, ACE could not replace the man hours, professional expertise, and broad industry knowledge that hundreds of agents bring to bear on thousands of private transactions each year.
17. Peter, you’ve said that even from your early MBA days, you knew you’d one day start a business of your own – wouldn’t it have been easier to follow the family into being a Canadian doctor? What made up your mind?
PW: Well, let me start by saying I wouldn’t define pursuing a career in medicine as “easy” – having seen my family work in this field, I’m well aware of the challenges. From an entrepreneurial perspective I would go back even further, to high school. I always had an idea that I wanted to start a business-it’s just the size and scope of the ideas became bigger as time went on. I chose my education and career path, I hoped, to best prepare me for this. I started with engineering as a place to develop problem solving skills and work ethic.
Then I went into sales, which is critical to any new business in my opinion, regardless of whether the term “sales” is in your title or not, and these skills weren’t something that engineering had focused on. And frankly, there is a lot more to it than most people think. Then onto business school to get a broader business education, followed by investment banking to get a detailed financial education and experience with capital raising and mergers and acquisitions. Also, I saw it as a path to provide me enough of a personal financial cushion to be able to venture out as an entrepreneur. If you were to go back to my business school application essays, I stated that my goal was to work in banking for two to three years then leave to start a company.
It took longer than I anticipated, but after nine years in banking I was ready, and had also seen some things that gave me ideas along the way.
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