One broker-dealer is turning financial advisers into a key source of funding for venture capitalists and their high-risk, high-return deals.
Chicago-based Advanced Equities Financial Corp. is increasingly supplying Kleiner Perkins Caufield & Byers of Menlo Park, Calif., and other top VC firms with hundreds of millions of dollars in financing. It does this by tapping into the wealthy clients of its staff brokers, as well as those of independent representatives at its broker-dealers, First Allied Securities Inc. and Greenbook Financial Services Inc., both of San Diego, and FFP Securities Inc. of Chesterfield, Mo.
This year, Advanced Equities' 800 independent reps and 70 staff advisers are expected to facilitate deals involving $715 million in VC financing, said Joel Marks, chief operating officer of Advanced Equities. That is up significantly from $400 million last year and $216 million in 2005.
Next year, Advanced Equities expects its reps and advisers to facilitate about $1 billion in VC financing, Mr. Marks said.
For VC firms, the partnership provides access to a ready and renewable source of capital.
“They are as good as the investment banks on timeliness and scale on this kind of deal,” said Bruce Dunlevie, general partner of Benchmark Capital of Menlo Park, Calif., which has $3 billion of VC assets under management.
For advisers, the partnership is good for the bottom line.
“It's more than tripled my production in two years [from a base of $500,000], and it's driven a ton of referrals,” said Robert Marassa, a broker and senior vice president at Advanced Equities.
The advisers can earn massive commissions. One Advanced Equities broker, for example, earned a $1.5 million commission in one day by placing $52 million with a VC firm.
The company is able to compete with the VC boutiques because it doesn't charge the traditional 2% management fee, nor does it collect the usual 20% on the fund's profits.
“We end up splitting the lack of a two and 20 with the VC firm in a competitive-bidding situation,” Mr. Marks said.
Of course, such investing isn't for the faint of heart. By steering clients into dicey investments that might — or might not — pay off, advisers run the risk of one day being in the position of having to explain to those clients why their portfolio experienced tremendous losses.
“It's always a bet,” Alois Pirker, analyst with Boston's Aite Group LLC, said of VC investing. “You don't make high returns for no reason.”
That risk, however, can be lessened by dealing with sophisticated investors who are familiar with the risks and rewards of venture capital, said a rep affiliated with First Allied, Chad Coe, president of Coe Financial Group Inc. of Deerfield, Ill.
“You're not selling it; people are buying it,” he added.
An exclusive right to VC deals also provides advisers with access to ultra-affluent customers, industry experts say.
“It's a great door opener,” said Caprice Mallet, managing principal of Biltmore Wealth Advisers LLC of Phoenix, who is an independent rep at First Allied. “Before, I had nothing unique to offer to affluent people, compared to the guy at Merrill [Lynch & Co. Inc. or] Smith Barney [both of New York], or a family office.”
The very biggest doors are opening, Mr. Marks said.
Forty-seven of the Forbes 400 wealthiest individuals, including billionaire investor Carl Icahn, have invested in VC deals through 170 different Advanced Equities reps and brokers, he added. For Advanced Equities, the ability to offer access to VC deals helps in another important area: recruiting, said Larry Papike, president and owner of Cross-Search, an executive-recruiting firm in Jamul, Calif.
“This puts them on a level with Commonwealth, LPL and Raymond James,” he said, referring to Commonwealth Financial Network of Waltham, Mass., Linsco/Private Ledger Corp. of Boston and San Diego, and Raymond James Financial Services Inc. of St. Petersburg, Fla.
But whether Advanced Equities can maintain this upward trajectory remains to be seen, Mr. Pirker said.
“It's hard to believe it can go upward like that, and nobody enters. I would expect other people coming in” to compete, Mr. Pirker said.
That may be so, but Advanced Equities' position in the market appears solid.
“They have a good track record of raising capital in a timely manner,” said Roland Van der Meer, managing partner of ComVentures LP of Palo Alto, Calif. “The VC firms come back because they get the job done.”
In raising funds for VC firms, Advanced Equities is exploiting a niche that blew wide open after the technology bubble burst early in the decade, when the market for venture capital financing all but dried up.
Previously, when companies needed a cash infusion of $50 million or $60 million, they obtained it by going public. By increasing accounting costs, the Sarbanes-Oxley Act of 2002 made that option less attractive for smaller companies.
Meanwhile, many niche investment banks pulled back on their VC financing after the tech debacle.
“Hambrecht & Quist, Robertson Stephens [& Co.], Montgomery Securities [LLC, all of San Francisco] and Alex. Brown [& Sons of Baltimore] all did this private-placement option that was not noticeably different from what Advanced Equities is doing,” Mr. Dunlevie said. “Nobody rebuilt that functionality until after the bubble burst.”
Brooke Southall can be reached at [email protected].
