|Prime Brokerage Anatomy™|
There was an urban legend in my town about a seventh former at the local high school who rented out 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 — naughty genius, in its way, but of a gentle kind, compared with what kids get up to these days.
Now a room in a Christchurch student in the ’80s cost about forty bucks a week, and there were enough randy high-school seniors that the place was constantly in use. No-one paid more than a fiver and our young entrepreneur made a tidy profit on the side.
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 se that sunk him, but doing it during double biology if you catch my meaning. Fnarr fnarr.
Now what has all this to do with the honourable practice of capital introduction? Well, analogy: the introducer rents out some space for investors and managers to size each other up, keeps well out of the way, and the benefits accruing to the introducer are just as tangential, and the 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.