Technological and regulatory advances have played a major role in the way we as individuals and businesses receive and consume information. How has this impacted your investment landscape and the decisions you make in your portfolio? I explore this topic throughout this document while encouraging my readers to familiarize themselves with Title II of the JOBS Act.
There are a wide variety of hedge funds and venture capital funds that all claim to have the right “secret sauce” in beating the S&P 500 Index. The S&P 500 has outperformed the Bloomberg hedge fund aggregate Index for last 5 years. 2013 was the worst year on a performance basis since 2005 as hedge funds returned on average a 7.4% return vs. the SPX 29.6% return.[1] From January of 2009 through July 2014 the S&P 500 is up 113.75% or an 17.06% annualized return before dividends versus the Credit Suisse Hedge Fund Index being up 55.33% or an 8.21% annualized return before fees[2].
Venture capital funds have not been a slam-dunk investment by any stretch of the imagination either. A major study conducted by the Kauffman Foundation was released in May of 2012 and entitled “We Have Met the Enemy…. and He is Us.” The Kauffman Foundation Investment Team analyzed their 20-year history of venture investing in nearly 100 VC funds – – many of them “household name” venture funds. What they found that is that only 20 of 100 venture funds generated returns that beat a public-market equivalent by more than 3 percent annually and the majority of funds, 62 out of 100, failed to exceed returns of the S&P index funds, after management fees and carried interests were paid. In addition to delivering underperformance, many of the venture funds had lock-ups of 10 or more years[3]
The question accredited investors should be asking themselves, “Is the traditional “2 and 20” fee structure hedge and venture funds charge worth paying?” There will always be outliers and those venture and hedge fund managers that outperform their peers by a wide margin. It is naïve to make general, broad based assumptions here, but there is mounting evidence and an argument to be made that the traditional hedge and venture performance and payout models are broken. Will the “2 and 20” fee structure become a thing of the past?
The world of investing is changing in front of our very eyes, thanks in big part to the JOBS act and the incredible technological advances in the way products (including investment opportunities) are marketed. Deal Labs believes this change in the infrastructure of the investment world can potentially bring an investor more familiar opportunities on a frequent basis. Deal Labs envisions a more efficient landscape where our investors have more deal flow to choose from that is ultimately revealed to them based on attributes they possess. Upon joining our team as an accredited investor or QIB we believe it is important for our investors to begin to comprehend the major regulatory changes that are directly impacting their current investment landscapes.
The SEC issued regulations regarding Title II of the JOBS Act on September 23, 2013, which lifted the ban on general solicitation. Title II of the JOBS Act allows for private equity transactions to be marketed broadly to investors using all available media platforms (e.g. TV, radio, seminars and, most significantly, the internet) and provides accredited investors awareness of, and direct access to the types of deals that were once only known to hedge funds, venture capital firms and other institutional investors. This shift in policy could bring an unprecedented amount of capital into companies in development or in hyper-growth mode. Moreover, Deal Labs has observed that some experienced entrepreneurs who have compelling new ventures want to avoid taking venture capital, given that VCs often have a different agenda than the management at the issuer.
The accredited investor who wants access to early-stage, later-stage, and even public companies looking for new investors will no longer need to rely on the traditional channels and will therefore be able to avoid significant management and performance fees. Title II of the JOBS Act allows for a simple and compelling way to use technology to raise capital for entrepreneurs and executive management for companies and partnerships.
At Deal Labs we have identified a major market opportunity that is a product of technological trends paired with the regulatory changes previously discussed. Deal Labs uses technologies to connect businesses and partnerships with accredited investors and QIBs. Through a sophisticated stack of marketing automation, CRM technology and databases, we find investors that we believe may be well suited for a specific investment. Each investor is delivered a deal announcement providing basic information on the offering. From there, interested investors are invited to learn more about the deal through the virtual deal room – permitting the investor to make an informed decision.
Deal Labs is currently building an investor base that believes in a customized relationship and consistent access to more investment opportunities. We believe it is important to limit deal offerings to certain investors, which is why we focus on key attributes of our investors, so that those investors are suited for a particular offering. If you would like to learn more about Deal Labs please contact us at info@deallabs.com.
[1] Bloomberg:
[2] Source: Bloomberg LP
[3] Ewing Marion Kauffman Foundation: We Have Met the Enemy….and He is US, May 2012
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