Despite rule change, some alternatives managers won't embrace marketing

Alternative asset managers, industry advisers and consultants say the SEC's lifting of the 80-year ban on marketing and solicitation could improve some information flow for institutional investors and potential investors. But they see some firms opting to remain under the old regime.

And for funds with certain commodity strategies, the new SEC rules might not fit with existing U.S. Commodity Futures Trading Commission rules, prompting funds with those strategies to remain under the old regulations as well.

The Securities and Exchange Commission proposed new rules earlier this month that are open for comment for 60 days from the date they are published in the Federal Register, expected to be sometime this fall, on marketing for alternatives investment managers. The new rules were mandated by the Jumpstart Our Business Startups Act of 2012.

In the private alternatives investment world, knowledge is power. Information can give investors a window into their managers' investment strategies, returns and methods for calculating those returns. Insiders say removing the marketing ban could help the flow of information reach the levels now existing with traditional money managers.

“At the end of the day, it's all about information,” said Heather M. Stone, partner and chair of the fund formation practice group in the Boston office of law firm Edwards Wildman Palmer LLP.

“My hypothesis is that for sophisticated limited partners, they will have this new rule as another arrow in their quiver,” said Ms. Stone, who represents both investors and managers. “You (alternative investment managers) have no excuse of why you don't need to give me this information. You will have to flat out say you don't want to give it to me.”

Hopefully, the removal of the marketing ban will halt the rumor mill constantly churning on which alternatives managers are or are not fundraising, she said.

But it most likely willnot result in a flood of information flowing to investors, potential investors and the public.

The kind of information general partners don't like to share with limited partners is information concerning portfolio companies, rather than fundraising information.

“I don't see general partners ever becoming more comfortable sharing that kind of information,” Ms. Stone said. “That will also continue to be a problem.”

No industry observer expects the likes of Kohlberg Kravis Roberts & Co. and The Blackstone Group LP to start taking out Super Bowl ads just yet.

Instead, the biggest change in the marketing— or “general solicitation,” as it's known in the rules — is expected to result in greater traffic in institutional investors' mailboxes and voice mail accounts. Under the existing ban on marketing, managers were prevented from contacting investors with whom they did not have a prior relationship, explained John B. Ayer, partner and co-head of the private investment funds practice based in the Boston office of law firm Ropes & Gray LLP.

“We will certainly see a different fundraising environment,” Mr. Ayer said. Alternatives investment managers “will be expanding direct efforts to market to new investors without being concerned with engaging in general solicitation,” he said.

Investors should probably expect managers to send private placement memorandums to large groups of institutional investors or, at least, send teaser e-mails to investors with whom they do not have existing relationships, Mr. Ayer said.

“Expect to see that more,” he said.

Yariv Itah, partner at consulting firm Casey, Quirk & Associates, Darien, Conn., agreed the biggest impact will be on investors that are new to a particular alternatives manager.

“Hedge funds, or alternative investment firms more broadly, will feel more comfortable sharing more information with investors, even though they are not clients,” Mr. Itah said. “Sales people and investor relations people will feel less regulatory constraints with their actions. They will have less of a need to consult with lawyers about potential clients.”

In many ways, under the current ban alternatives investment marketers practice self-censorship, fearful of speaking at conferences or publicly discussing their firm lest it be considered marketing, Mr. Itah said.

Hedge fund staffers are now very concerned with crossing lines, he said.

Mr. Itah added that alternative investment managers could begin adopting traditional investment managers' model for information sharing in which information is not as difficult to get.

Still, it is difficult to see what the ultimate impact of the new rules will be. Managers can still opt to do private placement under the old regime, said Ropes & Gray's Mr. Ayer.

“Under the old regime, you don't have to take reasonable steps to verify that an investor is an accredited investor. You just get a representation from the investor,” Mr. Ayer said.

The SEC is creating a double track. The SEC is giving managers the option of filing their private placement under the new rules, with no marketing ban, or under the old rules, which contain the marketing ban. However, many firms will most likely elect to file a private placement under the new rules, where they are not restricted from engaging in general solicitation, he said.

In practice, some observers don't expect the largest and most well-known alternatives investment managers to change anything. “In my view, those managers are unlikely to change marketing efforts and use general solicitation,” said Kevin Scanlan, partner in the New York office of law firm Dechert LLP. Sizable, well-known firms already have a loyal base of large institutional investors and the additional money that could be raised through a general solicitation would not be worth taking on the extensive burdens imposed by the SEC under the proposed rules, he explained.

However, well-known managers whose performance has slipped might be likely to avail themselves of the new marketing freedom, Ms. Stone said. And smaller managers also will be more likely to take advantage of the new marketing rules.

“I think what the SEC rule will permit would be to make contact with people you don't already know easier,” Mr. Scanlan said. “It would make cold calls and mass mailing and billboards and the like available to managers and once they made contact with investors, there would be a freer flow of information.”

New or smaller managers will be most concerned with their brand.

”Hedge funds should be concerned about their brand. Those that will choose to get their name out there will be those who don't have very strong brand recognition in the market,” said Mr. Itah. “Well-established, well-known large hedge funds would not make big changes with communication to the market.”

For their part, many alternatives investment managers are not jumping immediately into the advertising pool. “We'll be assessing it over the coming months,” said Kristi Huller, spokeswoman for New York-based Kohlberg Kravis Roberts & Co. LP.

Said Tonia Nelson, chief risk management officer for Harrison Street Real Estate Capital LLC Chicago, in an e-mail: “We don't see this change impacting our business given that our fundraising efforts are based on relationships we have developed over time in the industry.”

Harrison Street Real Estate last week closed its fourth opportunity real estate fund with $750 million in total commitments.

“Currently the strong managers provide their institutional LPs (limited partners) with constant and clear communication regardless of this ruling,” Ms. Nelson wrote. “You may see more firms trying to raise money through media channels, but this won't change that successful fundraising will still come down to those funds with the right strategy and internal process rigor.”

Other managers are waiting to see what the U.S. Commodity Futures Trading Commission will do. One of the technical issues with the SEC's proposed rules is a potential problem for funds with commodities strategies, Mr. Ayer said. Under the new rules, alternative investment firms with certain commodities strategies could only maintain their current CFTC regulatory exemption if they stick with old regime, Mr. Ayer said.

A few managers with commodities strategies contacted by Pensions & Investments, all of whom declined to be identified, said they are waiting to see if that will be addressed in the final rules.