We recently announced a strategic partnership with Lighthouse Prime Services. We are excited about the opportunity as we are working with a group that recognizes that in order to do “cap-intro” correctly, you need to work with people that are talking to investors every day.
For years, we heard the common refrain that, “our prime will raise us capital.”
I recently came across the article above that unequivocally refutes that position.
Tips for choosing a prime brokerage
Former President of Bear, Stearns Securities Corp.
Tip 4: Choose a prime broker who is honest about the capital introduction process.
If a prime broker promises to “raise” capital for you, it is either lying or violating the law. Let me explain. Hedge funds are sold as private placements and are technically continuously in distribution. This means that they require continuous due diligence by any third party that is raising capital from investors. If a prime broker were to raise capital for a hedge fund, it would be taking on underwriting risk and no major firm would do that without sufficient compensation (remember that equity IPOs are done for something on the order of 7% of the assets raised and the typical hedge fund marketing firm charges “20 and 20”, that is, 20 percent of the management fee and 20 percent of the performance fee so long as the capital raised remains in the fund). What a prime broker will do is introduce you to potential investors—investors with the capacity and interest to invest in hedge funds. It is your job to raise capital and the investor’s job to perform due diligence. Also remember that a prime broker who raises capital for you can violate your regulatorily mandated marketing restrictions because you don’t know what the prime broker is saying about you. Raise capital yourself—let your prime broker play a role only by introducing you to qualified investors.