For private equity and venture capital funds looking to sell shares to retail investors, a managing broker-dealer (MBD) can be a valuable partner. This is a broker-dealer firm that designs and manages the distribution and marketing strategy on behalf of the fund. This role typically involves coordinating the sale of the fund’s offerings, ensuring compliance with regulatory requirements, assisting with the selection and alignment of vendors and overseeing a network of broker-dealers and financial advisors who sell the fund to investors. The managing broker-dealer plays a key role in connecting the fund to the industry and with potential investors, leveraging its networks and providing expertise to effectively market and distribute the fund’s investment opportunity.
The Distribution Partner
Partnering with a managing broker-dealer when fundraising for a private equity or venture capital fund offers several advantages.
Distribution – Managing broker-dealers have established networks of investors and financial advisors, providing access to a broad investor base.
Compliance – MBDs bring expertise in navigating regulatory requirements, ensuring compliance in the fundraising process.
Expertise – The experience of an MBD in sales and marketing of investment products can significantly enhance the effectiveness of fundraising campaigns.
Strategy – Managing broker-dealers can offer strategic advice on positioning the fund in the market.
Operations – An MBD can advise fund management on operational best practices and necessary service providers (bank, administrator, auditor, valuations, etc.) with proven track records of working well together.
Working with a managing broker-dealer allows the fund manager to focus on investment strategies and fund management, while leveraging the MBD’s expertise and networks for fundraising, compliance and operations.
The Selection Process
Managing broker-dealers often have specialties in certain fund structures, investor types or distribution channels. MBDs typically work with a limited number of client funds each representing a distinct asset class or investment philosophy as it would be counterproductive to promote multiple funds that are in direct competition. MBDs select fund managers to work with based on several qualifying criteria.
Track Record – Does fund management have solid past performance, a proven investment strategy and market expertise?
Alignment – Does the investment philosophy and the potential appeal of the fund’s strategy align with the MBDs investor base?
Risk Management – Do the fund’s investment practices take sufficient account of potential risks?
Operational Efficiency – Is the fund’s back office prepared to handle the growth and regulatory scrutiny that will come with successful fundraising?
Compliance History – A solid record of regulatory adherence ensures a reliable and trustworthy partnership.
This careful selection process ensures that the broker-dealer collaborates with fund managers who align with their standards and client expectations and are in every way ready for the retail investor market.
The Cost
The cost of raising capital through a managing broker-dealer can be higher than other methods of fundraising. This is primarily due to the fees or commissions MBDs charge for their services, which include access to their investor networks, marketing, regulatory compliance and sales expertise. These fees are typically a percentage of the capital raised.
In contrast, direct fundraising methods, like establishing selling agreements with financial advisors directly, reaching out to investors online or personally, leveraging existing investor networks or using digital platforms, may incur lower direct costs but require more effort and resources from the fund manager to be effective. Direct methods offer nominal cost savings but can be more labor-intensive and slower than leveraging the services of a managing broker-dealer. Indirect costs like personnel time and marketing expenses can be extensive.
The advantage with MBDs is the broader reach and professional management of the fundraising process and the freedom of fund management from the fundraising burden which justifies the higher cost for many funds.
Conclusion
Raising capital for a private equity or venture capital fund using a managing broker-dealer is often worth the cost due to their extensive investor network, market expertise and ability to handle regulatory compliance. The MBD’s operational knowledge and access to a proven network of vendors prevents inexperienced fund managers from potentially making costly mistakes.
Leveraging an MBD’s established relationships and sales infrastructure can lead to broader market reach and potentially quicker fundraising. Their expertise in positioning, marketing and presenting investment opportunities can significantly enhance a fund’s appeal to potential investors, justifying the associated costs for many funds.
