Capital introduction
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Prime Brokerage Anatomy™
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There was an urban legend in my town about a seventh former at the local high school who had the idea of renting a room in student flat where he and his buddies could take their respective BFFs and GFFS for a bit of healthy slap-and-tickle away from their parents’ prying and judgmental eyes. It all seems a bit quaint now, doesn’t it — genius, in its way, but of a gentle kind compared to what kids get up to these days. But in the eighties, in Christchurch NZ, this was quite the scandal.
Now a room in a student flat back then cost forty bucks a week, and there were enough randy high school seniors that the place was constantly in use and no-one had to pay more than a fiver and he made a tidy profit.
Anything wrong with this? Ask no questions, tell no lies — in the good old days, you’d say maybe no, but nowadays not so much. The guy on the lease eventually got rumbled and was expelled from his school on the gloriously bombastic grounds of “operating a brothel during school hours”. Note, fellow lovers of form over substance, that it was not renting the place per so that sunk him, but doing it during double biology — fnarr fnarr — if you catch my meaning.
What has all this to do with the honourable practice of capital introduction? Well: the accruing benefits to the introducer are equally tangential, and the formal risks of getting your shape wrong just as catastrophic. “Cap intro” is the tricky business, engaged in by the “consultancy” arm of a modern prime broker, of putting prospective investors and putative investment managers together — getting them a room, if you like — without looking like it was anything to do with you.
The name of the game is avoiding looking like a “placement agent” (that is, appearing to be marketing the fund's securities and thereby taking on prospectus liability) and to avoid your activity inadvertently bringing the fund in scope for local regulations on hedge funds in a potential investor’s jurisdiction, to which it would not otherwise be subject, and which might apply if it were thought to be offering its securities directly in that locale. Like AIFMD, for very good example.