Like Magic! Russian Hedge Fund’s Money and Boss Disappear

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AR6040-001Brokerdealer.com blog update is courtesy of The Wall Street Journal’s Bradley Hope.

As part of the membership to Brokerdealer.com, members have free access to an investor database that offers access to many different types of investors including hedge funds. When picking your next investor, whether it be on a national or international level, be sure to pick an investor who you can trust and won’t lose all of the company’s assets like the Russian hedge fund, Blackfield Capital CJSC recently experienced.

Blackfield Capital CJSC was one of Moscow’s hottest hedge funds, hosting glitzy parties and embarking on ambitious plans to expand to the U.S.

The firm’s founder in 2013 even rented a Manhattan apartment for a record-setting price, according to a real-estate broker, and instructed his U.S. staff to buy a $300,000 sports car.

Now, the founder is missing, allegedly along with all of the firm’s assets, according to former employees, in an international mystery that has captivated Moscow’s investment community.

The firm’s employees didn’t know anything was amiss until mid-October, when three men charged into Blackfield’s offices in an upscale complex along the Moscow River in central Moscow, said people who were there.

The men, who didn’t identify themselves, said they were looking for Blackfield’s 29-year-old founder, , according to the people who were there.

But Mr. Karapetyan wasn’t in the office that day or the next, when senior executives explained to the staff of about 50 that there was no longer any money to pay their salaries, said one former senior executive and ex-employees. The executives disclosed that all the money in the company accounts—some $20 million, including investor cash—was also missing, they said. It couldn’t be determined whether investors were from Russia or other countries.

“Our CEO just…disappeared,” said Sergey Grebenkin, one of the firm’s software developers, in an interview.

Efforts to reach Mr. Karapetyan by phone, email and through associates and friends weren’t successful. Other senior executives didn’t respond to requests for comment.

Mr. Karapetyan hasn’t been accused of any wrongdoing. It couldn’t be determined whether the firm was still operating.

Interviews with more than a dozen former employees and executives at rival investment firms in Russia, as well as documents from the U.S., Russia and the U.K., provide a look at the firm’s demise.

Blackfield was launched in 2009 with plans to be on the cutting edge of modern markets. The firm focused on algorithmic trading, or the use of statistical analysis to detect patterns in the markets, on the Moscow Stock Exchange. By 2013, Blackfield traded as much as 2% of futures and options contracts on the Moscow exchange some days, according to former employees and rival firms. Several former employees said Mr. Karapetyan told them the firm once managed as much as $300 million.

For Hope’s entire Wall Street Journal article, click here.

Private Market Valuations Exceed IPO Valuations: Is This a Bubble??

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private-company-valuations-temp-112614-4Brokerdealer.com blog update inspired by 2 Jan WSJ column by business news journalist Liam Denning

For broker-dealers, investment bankers, and those following the investment strategies of private equity and venture capital firms, this is one of the better plain-speak summaries profiling the current climate of investing in private companies. The recent outsized valuations during 2014 have caused greybeard investors to scratch their heads…as the outsized pre-IPO valuations are counter-intuitive to traditional investment analysis of private companies, particularly given the assortment of “lower-than-last-private round” post IPO valuations that these same companies are being given in the public marketplace.

For private companies that wish to network with deep-pocketed angel and/or institutional investors, Brokerdealer.com provides an investor forum that connects start-up entrepreneurs with those who can see the forest through the trees.

Below please find excerpts of Liam Denning’s reporting..

Buying a stock, with all its attendant filings, analyst coverage and forecasts, still can be a gamble. So imagine getting excited about one isolated price signal on a private company with all the disclosure of the Air Force’s Area 51.

Yet that is what is setting pulses racing as 2015 dawns. Xiaomi, a closely held Chinese smartphone maker, recently raised $1.1 billion at an implied valuation of more than $46 billion. That puts it ahead of Uber Technologies, the unlisted ride-booking application developer that got new funding in December valuing it at $41 billion. Both numbers also are higher than the market capitalizations of roughly three-quarters of the S&P 500’s members.

In theory, such startup valuations matter little to anyone but a relative handful of founders, employees and venture capitalists. The average investor doesn’t get a seat at the table or more than an occasional glimpse of what even is on the table.

In practice, news of such amazing, and seemingly unobtainable, investments stoke bullish sentiment, leaving individual investors potentially vulnerable.
Venture capitalists and other insiders usually do extensive due diligence before committing to the likes of Uber. But their basis for valuation differs from the approach of mainstream investors buying stocks, with venture funds also considering exit timelines, the cash needs of a startup to keep expanding and maintaining incentives for management and owners as equity stakes get parceled out. They also can, of course, just get things wrong.

Ordinary investors also must consider the wider context. In a world thirsting for yield amid ultralow interest rates, money has sought riskier corners of the market. Almost $24 billion of new commitments flowed to U.S. venture funds in the first nine months of 2014, according to the latest data from Thomson Reuters and the National Venture Capital Association. That is more than in each of the preceding five years in their entirety and sets up 2014 to have been the biggest year for new venture money since before the financial crisis.

This raises the risk of dollars being deployed into questionable businesses, which then eventually find their way into the wider market via initial public offerings, which are priced off the back of those high startup valuations.

For the entire WSJ story, please click here.

Startups Bypass BrokerDealers and Investment Bankers

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154012464-304BrokerDealer.com blog update courtesy of extract from Jan 2 WSJ story by Telis Demos

Wall Street is dealing with new challenges in one of its bedrock businesses, taking young companies public, as more startups choose to stay private longer.

A number of Internet, software and consumer companies are raising huge sums in private deals that enable them to postpone initial public offerings for years, if not indefinitely. Moreover, they often negotiate these private placements directly with investors, bypassing banks.

Initial stock sales are still thriving, despite the big private companies that have held out on an IPO. This past year was the biggest for U.S.-listed IPOs since the dot-com peak in 2000.

But the trend of companies staying private could present longer-term problems for banks. If companies delay or avoid going public, it could threaten the fees and other relationships—with investors, hot young companies and wealthy executives—that banks get from working on IPOs.

Some Wall Street firms are responding by beefing up their teams that work on the private deals, which also gives the firms another chance to build links with startups that may do an IPO later. The private deals could also generate a new stream of fees before the eventual IPO windfall.

“It’s obvious why banks are ramping up for more private offerings,” said David Erickson, a former banker who is now an operating partner at venture-capital firm Bessemer Venture Partners. But because company executives “have already met a lot of public investors by that time, the pitch for bankers is likely more challenging,” he said.

For the full WSJ story, please click here.

IPO Market Recovers, Gives Some Hope to Silicon Valley, But Not Much

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Silicon_valley_titleBrokerdealer.com blog update profiles the recovery of the IPO market and the effects it had on Silicon Valley companies courtesy of Venture Beat’s Chris O’Brien.

Although it was a great year for IPOs, it was not necessarily a good for brokerdealers, as O’Brien explains later on, returns on IPOs in 2014 took a dramatic drop compared to returns on IPOs in 2013. Nonetheless, a strong IPO showing is projected for 2015, which could create big returns for brokerdealers in the New Year. In addition, Silicon Valley has plenty to stress as about as there wasn’t a huge IPO growth made in tech industries, the surge of IPOs came from health and biotech fields.

A tech industry that had spent years waiting for a revived IPO market finally got its wish in 2014.

The overall IPO market reached a level not seen since 2000. And Silicon Valley companies rode that wave as venture-backed IPOs soared, according to year-end data from Renaissance Capital.

Within these ample gold and silver linings, there are a few clouds looming for the tech industry as well.

First, let’s start with the good news. Here are the highlights from Renaissance:

  • The 273 IPOs in 2014 was the most since 406 IPOs in 2000.
  • IPOs were up 23 percent over 2013, even though there were some global scares like the Ukraine crisis and Ebola that in years past might have causes stock markets to freak out.
  • Money raised climbed 55 percent to $85 billion, though Alibaba accounted for $22 billion of that.
  • The number of venture-backed IPOs climbed to 124 this year, up from just seven in the dark economic year of 2008.
  • A solid pipeline and strong US economy should mean another strong IPO showing in 2015.

So, what’s there to worry about amid all this rosy news?

1. Returns were down: The boom in the number of IPOs was not necessarily great for investors. Average IPO returns were only 16 percent, a big drop from the 41 percent return on IPOs in 2013. That could put a chill on IPOs in 2015 if the trend continues.

2. Tech is not king: The surge in IPOs was led by healthcare and biotech IPOs. In particular, the overall numbers were padded by the 100 healthcare IPOs in 2014, a jump from 54 the year before. Slice off that healthcare increase, which mainly included a lot of small-cap companies, and the number of IPO offerings was about the same as 2013.

3. 2014 was very good, not great, for tech: There were 55 tech IPOs in 2014, up from 45 the year before. Those IPOs raised $32 billion, though that includes Alibaba’s $22 billion haul. Back that out, and you still have a nice increase from the $7.9 billion raised in 2013. But tech companies are hardly printing money. And talk of a bubble remains just plain silly.

4. China rules: This year will be remembered for the monster Alibaba IPO offering, followed by China’s JD.com offering that raised $1.8 billion. Those were the only two tech companies to make the list of the year’s 10 largest IPOs. And with China’s Internet population more than double that of the U.S., the center of the tech world could continue its shift to Asia.

None of these things should dampen the tech industry’s celebration of a solid year. But they’re a good reminder that Silicon Valley shouldn’t get overconfident when it comes to IPOs and think just any company with a little momentum can go public. Investors can afford to be selective.

And, really, that’s probably a good thing for all of us.

For O’Brien’s original article in Venture Beat, click here

 

Private Equity Firms Now Face Up To Fee Schemes

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double dipBrokerdealer.com blog update courtesy of Mike Spector and Mark Maremont of the Wall Street Journal.

For years, Private Equity firms have doubled-dipped by receiving management fees from their institutional investors, and at the same time, have pocketed hundreds of millions of separate fees from the companies they have acquired on behalf of those same institutional investors. For the first time, these firms are being pressured by investors, and in some cases, federal regulators to stop the practice of double dipping or face further scrutiny.

The investment firms usually collect the fees from companies they buy for providing services such as consulting, serving as directors and helping them make their own acquisitions. Instead of keeping some of the money, the buyout firms, in new funds they are raising, will now pass the fees on in full to investors in the funds.

The payouts being reimbursed, known in the industry as transaction and monitoring fees, have provided many private-equity firms with a steady income stream augmenting their share of investment gains on deals, which remain the key source of profits from their buyout funds. Private-equity firms buy companies using a combination of cash raised from investors and borrowed money with the aim of improving the companies’ value and selling for a profit a few years down the line.

Buyout firms often receive transaction fees from a company after completing a takeover and for other deal activities, and monitoring fees for consulting and other work while holding the investment.

The turnabout by managers including Blackstone Group LP, KKR & Co. and TPG represents a significant concession in the face of persistent clamor for the private-equity industry to do a better job sharing and disclosing their fees.

The decision by private-equity firms to essentially reimburse investors with payments that can amount to tens of millions of dollars or more, sometimes on just one transaction, shows the increased influence wielded by investors such as public pension funds that historically accepted terms buyout firms proffered.

For Spector and Maremont’s entire Wall Street Journal article, click here.