NEW YORK: In the month after Goldman Sachs brokered a private placement for Facebook, Wall Street banks including Bank of America and Citigroup looked at trying to do similar deals, but many have since backed away.
Banks are hesitant to follow in the footsteps of Goldman and JPMorgan Chase & Co because of inflated valuations, regulatory concerns and media hype, bankers and lawyers say.
Goldman Sachs Group Inc's $1.5 billion Facebook deal gave the world's No. 1 Internet social network, which is expected to go public in the spring of 2012, a market value of $50 billion. Weeks later, an investment by private-equity firm General Atlantic valued it at $65 billion, CNBC reported.
JPMorgan Chase recently set up a fund for wealthy clients to invest in social media companies. "You don't have to be a genius to figure out that if Goldman Sachs is looking to invest in Facebook, that there are other opportunities out there and Goldman's competitors want to ferret that out," said Gregg Berman, a partner at law firm Fulbright & Jaworski.
Investors are keen to snatch up shares of social media companies, and banks are eager to develop a relationship with these companies before they are public. When it comes time for a company to pick a bank to underwrite an IPO, it may be more likely to select a bank it has already worked with.
People at Bank of America Corp, Citigroup Inc, Credit Suisse Group and Morgan Stanley have recently attended presentations on private placements by a New York-based lawyer, prompted by Goldman's Facebook deal.
The lawyer and other sources in this story declined to be named because the information is not public. They said that any decisions could change. Morgan Stanley, Citigroup, Credit Suisse and Bank of America declined to comment.
Putting these deals together in a way that works for investors, companies, and regulators is tough, lawyers said.
The Volcker rule, which limits banks' ability to invest their own money in ventures, is a big hurdle to many that would try to follow Goldman's Facebook investment. Goldman invested both its own money and client money in the deal.
If, on the other hand, banks mimic JPMorgan and use exclusively client money to invest in these deals, conflicts between the bank, investors and the companies could emerge.
The funds may also run afoul of Securities and Exchange Commission rules limiting private companies to 500 shareholders, sources said.
Raising money privately for big tech companies without garnering unwanted publicity is also a hurdle to making these deals happen, lawyers said.
Wealthy individuals are clamouring to buy shares of social media companies like Twitter and Zynga now, before any potential IPO. Investors in private companies often can buy shares at a lower price, and can buy a larger stake of a company, than they could in an IPO, making for a big payday.
But such a payday depends on a hot IPO market and the companies moving forward with their IPO plans.
Twitter co-founder Biz Stone told Reuters in Korea earlier this week that his company has no plans to go public in the near future. The New York Times reported this week JPMorgan had indirectly acquired an approximate 9 percent stake in Twitter through a fund operated by an angel investor.
Getting multiple investors into these companies without running afoul of securities laws also requires some manoeuvring. A private company usually wants to have less than 500 shareholders of record, because having more forces the company to disclose financial statements publicly.
Being forced to disclose this information without being publicly traded is in a sense the worst of both worlds for a company: it must give out as much competitive information as a public company, without having as much access to capital.
Under SEC rules, funds can count as a single investor in a private company, even if the fund has scores of investors.
But these rules are meant to apply to funds like venture capital funds that invest in multiple private companies.
A fund that is nothing more than a "special purpose vehicle" or SPV, funnelling money from many investors into a single company or a small group of companies is unlikely to count as a single investor, lawyers said.
SEC chairman Mary Schapiro earlier this week told Reuters that private placements in hot tech companies are "an active area of review" and that the SEC was looking into financial disclosure, secondary market trading and whether the rules surrounding private placements may be outdated.[IDnN01192442]
"There is a fair amount of confusion in the market about SPVs," said Davis & Polk corporate partner Martin Wellington.
Managing the perception of conflicts is difficult as well, bankers and lawyers said. Wealth managers should be pushing to buy shares in a private offering at the lowest possible price for their clients, while an underwriter on an IPO is hired to get the highest possible price for the company.
If the wealth managers and the underwriters are under the same roof, a bank has to reinforce the clear division between the two groups and make sure they are looking out for their respective clients.
If the bank fails to do that, it could look like "buying clients with somebody else's money," said a former JPMorgan banker.
If investors lose money, charges of conflict could intensify. Investors, for example, could say the bank tried to generate underwriting fees and curry favor with a potential IPO client by overcharging clients for shares in the company.
Media attention can also interfere with these deals.
Goldman pulled its Facebook offering from US clients part way through the process, saying the intense media attention ran the risk of having it viewed as a public offering.
Under current rules, for a company to sell shares privately, neither its underwriters nor the company itself can advertise the offering.
"The headline risk facing the banks is literally headline risk in the sense that if there are articles in all these publications, the risk is that the SEC would say this is general solicitation or advertising," said Robin Bergen, a partner at Cleary Gottlieb Steen & Hamilton in Washington.
Comments
Comments are closed.