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Private Equity Warms to Funding Portals

Digital networks are using innovative technology to simplify private equity deal management for the middle market.

There is a stark contrast between how private and public firms connect in terms of access to capital, but funding portals and specialized online communities are increasingly leveraging technology and services to bridge the divide.

"Relative to the large public companies, there's a huge difference in what small firms can access in terms of capital markets powered by technology," says Peter Lehrman, CEO and founder of Axial, one of the largest digital networks for transactions and business owners. While larger public firms enjoy the openness of stock exchanges smaller private firms are left to scramble for exposure from investors, advisors and even potential acquisitions.

"We want to make it easier for small and medium sized companies to access that technology, and to save efficiencies on a scale that large companies enjoy."

The Axial community is designed to connect professionals who run, advise, finance and acquire revenue-generating private companies. By building a network where users can connect, educate, market, and easily access capital, Lehrman says the space is in some ways equivalent to people using LinkedIn to find jobs, or how investors use large exchanges to invest in public firms.

[Learn about social media best practices, seeAdvisors, Stop Posting Baby Pictures on Social Media.]

"We build a common platform where companies and lenders can say who they are and what they are looking for. It is a radically more efficient place where community and capital can connect with one another." While the online networks do not yet enable users to complete a trade for a private company as easily as we would for Google or Apple, the ability to find and connect is a big quantum leap forward in the ability for capital markets to organize themselves.

Lehrman adds that over the past ten years the practice of client dinners and conferences and golf outings have given way to private equity deals conducted almost entirely online. "The biggest shift is now is that more and more companies are seeing there's an opportunity to find online networks. And there is technology bringing this trend into the forefront."

The success of funding portals has increased demand for tools and services to move beyond introductions to the full end-to-end interaction. Many boast regulatory services, education from experts, summit meetings and regional events.

Keeping pace with demand, Axial recently joined forces with Merrill DataSite, a global virtual data room (VDR) solution to smooth along the furnishing of information like customer contracts and legal documents in a digitized and secure environment. "It doesn't seem like a particularly novel piece of technology anymore," says Lehrman. "But the process for private companies to access capital markets is a lot more cumbersome than for a large publicly traded company, so the arrival of cloud-based document repositories with security and permissioning protocols have made it more efficient… It's an important part of the process."

Axial's annual membership size has grown exponentially since opening in 2011, from nearly 2,500 to over 16,000. The number of transactions originating from the platform have jumped from 86 per month to 667. "It's a function of the growth of our company, but also growth of the category," he explains.

General Solicitation Regulations

The funding portal category was given a burst of activity thanks to a small but significant change in September 2013 to the JOBS Act over General Solicitation Regulations. Prior to the change, brokers and dealers couldn't participate in general solicitation of their products, requiring them to identify qualified and non-qualified communities and only solicit interest from the qualifying group. Although the SEC wasn't particularly diligent in enforcing this rule, the fear prevented many firms from dabbling in social media and crowd sourcing sites.

Portions of the JOBS Act relaxed the rules, including some of regulations on general solicitation. Now, with some qualification steps, little is holding firms back from soliciting. It's an important piece of the puzzle that makes it easier for Wall Street to use social media without running afoul of general solicitation regulations. And it's an important change in the regulatory apparatus that enforces American broker dealers, and it means they can now use platforms like Axial and LinkedIn with much more ease than before.

[For more on capital market firms experimenting with social media, seeING Goes Social: Rolls Out LinkedIn for Advisors.]

"There were a number of customers we wanted to service but couldn't until the regulations changed," explains Lehrman. "Customers come onto the platform to use and share information online in a controlled, but nonetheless social, setting. The number of companies who say they are comfortable doing that now because there's clarity from a regulatory perspective is really significant… And there are more degrees of freedom in terms of how they help clients access capital markets." Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio

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