FEATURE: Cyber Fund Raisers Promise to Stay Human –

The Internet is changing the private equity world in more ways than one. Web sites such as cbex.com and emergers.com have taken the M&A process into cyberspace, thus making it more efficient for sellers and buyers to correspond and conduct business with each other (BUYOUTS March 6, p. 29). Now entrepreneurs in the finance industry are hoping that Web sites like privatetrade.com and privateequityfunds.com can do for the fundraising process what online services are doing for the M&A process-create a more efficient market.

These Web site developers say the current fundraising market is inefficient because the methods of broadcast used by G.P.s in their correspondence with L.P.s differ from one firm to another. The founders of privatetrade.com and privateequityfunds.com say their sites will help make the marketing of private equity funds more efficient and standardized with interactive features such as video clip presentations and question-and-answer forums, in addition to the already available online private placement memorandum and marketing fundraising documents. With video clip presentations, developers also say their sites will make the process more cost and labor efficient by reducing the amount of cold calls, faxes and postal shipping of documents while attracting more offshore investors in the process.

But in spite of the flurry of activity in the Internet arena, industry observers say the fundraising process has not changed, and that it is still a relationship business.

John McLaren, a managing director at the Boston-based Monument Group, a private placement firm, says the concept of using the Internet to broadcast information to investors is “not a big deal” because his group has been using the Internet in that capacity for three years now. The group’s Web site is currently under construction.

McLaren says he already sends legal documents, due diligence documents and private placement memorandi to prospective investors via e-mail and the Internet. “The Internet can effectively and efficiently deliver documents to investors,” says McLaren. “It’s cheaper and easier for me to e-mail you information than to overnight it.”

Other placement agents who are relatively new to cyberspace think the Internet offers far greater potential than just an easy way to send documents to investors. Along with the plethora of fund information that investors can download from the Web, placement agents envision cyberspace as an informal meeting place between investors and fund managers where investors can get a first-hand look at G.P.s via streaming video presentations.

The early leaders of this movement include Dale Meyer, a managing director at BancAmerica Securities; Sean Twomey, a director at Credit Suisse First Boston Corp.; John Linger, a managing director at privatetrade.com, a marketplace for secondary investors; Paul Denning, a managing director at Chase H&Q; and David Conrod, managing director at Links Capital Group.

(Note: At press time, Dale Meyer had left Banc of America for Chase Securities. See story p. 3)

Chase H&Q is the first to offer investors a video clip presentation on offroadcapital.com (the site caters to angel investors interested in start-up companies) for CMEA Ventures’ newest fund, CMEA Ventures Information Technology II, LP. “In the time that it would take you to open the mail and look at the executive summary, you can spend the same amount of time looking at this thing live on the Web,” says Chase H&Q’s Denning. “The idea is to save time for the investors and fund managers, because some investors might not be interested in the fund after viewing the clip, and this would save the fund managers time in terms of scheduling meetings with potential clients.”

And by putting a face to a name of a fund manager, Denning thinks this feature will add more value for investors. “Investors probably have 30 private placement memorandums on their desk and this is just one way for fund managers to get their files to the top of the stack,” he says.

At the very least, Denning says, this would prepare investors for the eventual meeting with fund managers because “then they wouldn’t feel like they were meeting with strangers.”

But will camera-shy and tight-lipped G.P.s feel comfortable flaunting themselves and their products to the rest of the private equity community online? “Once people get used to the idea, there really is no reason not to do it,” says Denning. “This is theatre and once other firms pick up on this concept, it’ll be like a blowtorch on my back.”

Although the firm is holding its Web initiative close to the vest, Banc of America’s Meyer says in addition to video clip presentations, he wants a forum where investors can ask their questions and interact with G.P.s. “Going forward we would like to have that feature for every one of our projects,” says Meyer.

He says this is just a way to streamline the marketing process and do away with the sales calls and due diligence meetings. “The Internet is also helpful in going after alternate distribution channels such as international markets,” says Meyer. “If this can speed up and streamline the fund raising process, it’ll be easier for investors and G.P.s to exchange information. It’s just a tool to make the process easier for both sides.”

Meyer expects Banc of America’s private placement site to be operational in the coming months.

Other private placement groups such as CSFB are still considering a Web strategy, but agree there is real value in having one. “If you can access more investors on the Internet and provide them with information on a timely basis, then that’s a big step forward,” says Twomey. “Then you can have what we like to refer to as reverse inquiry’ where investors will go back to the managers and ask them for more information.”

However, investors still want to meet the managers before they commit any kind of capital. “It still remains to be seen if it can work,” says Twomey. With these uncertainties, Twomey says CSFB is still on the ground level of developing a Web strategy. “We’re still asking ourselves, How should we use this medium?'”

Current Web sites that cater to secondary and hedge fund investors are also moving toward developing a portal for private equity investors. Linger, who served as a placement agent at Atlantic-Pacific Capital, says privatetrade.com is also in its early stages of development and is not yet ready for operation. But,Linger says the site is intended for “open communication in the private equity market between buyers and sellers.”

“If you look at the private equity market today, it’s still fairly inefficient in the sense that no one has really made it a point to actually sit down and accumulate data for people to share,” says Linger. “We’ve had conversations with G.P.s and various folks on the pension funds side, and I get the sense that there is real need for standardization of information and this would be something they’ll be open to.”

Links Capital’s Conrod says his firm is presently offering hedge fund investment opportunities to investors via the Internet at linkscapitalgroup.com. The firm will also be offering investors private equity funds under a different domain name in the coming weeks. He says the Web site will offer online documentation to investors as well as streaming video presentations. “It’ll definitely compress the sales cycle, bring more transparency and standardization to the business, and be a good forum for global investors wanting to invest in private equity,” says Conrod.

Gatekeepers will be able to determine and access right off the Web site the kinds of information they want for their clients, says Conrod. “A lot of the paper and e-mail that goes back and forth between the placement agents and the gatekeepers will be reduced a bit,” he says.

Other firms reportedly in the process of forming a Web strategy include Donaldson, Lufkin & Jenrette with managing director Phil Pool at the helm of that initiative. A source close to the firm said its Web site will be operational, but declined to give further details citing that the Web initiative is still in its early stages of development.

Call Me?

Fundraisers and limited partners are open to the idea of a more efficient fund marketplace, but at the end of the day they say nothing replaces the one-on-one meetings with fund managers. Jon Vanderploeg, investment officer at the Wisconsin State Board, says placement agents are “pretty efficient” already in their marketing efforts, and he likes the “hands-on treatment” that he gets from them. However, he also adds he is not opposed to improving an already efficient process.

G.P.s also feel the need for personal contact with their investors. Glen Oken, a general partner at Tampa, Fla.-based FCP Investors, notes that usage of the Internet and e-mail is more prevalent today than a couple of years ago when his firm was in its last fundraising cycle. Many investors echo this sentiment. “I’d rather get documents online and through e-mail rather than through faxing because it is easier to deal with,” says Robert Maynard, chief investment officer at the Idaho Public Retirement System.

FCP Investors is prepared to use the Internet as an efficient broadcasting tool but wouldn’t completely abandon the traditional methods of fundraising, which involves a lot of phone calls and meetings, says Oken. “It’s nice to talk to an investor directly because they can get a sense of the qualitative as well as quantitative aspects of the fund and its people,” he says.