Regulation D strategy
- Thread starter AG
- Start date
Hi AG,
The illustration in the reading (Jaeger) is: hedge fund manager privately places (invests) in debenture convertible into stock, in a "private equity placement" that allows small companiues to raise equity capital, but importantly, with exemption from registrations requirements, known as Reg D http://en.wikipedia.org/wiki/Regulation_D_(SEC)
The hedge fund gets to purchase at a discount (in the reading example, 15%), which is directly owing to the lack of liquidity (compare to large PublicCo traded shares), but with expectation company will register in 90 days. So that's the essential quid pro quo: shares at a discount, with liquidity/credit risk waiting on registration event. Company registers, investors exercise their conversion rights.
From our notes:
By taking positions in smaller, riskier companies, Regulation D managers earn returns through credit and liquidity premiums. Specifically, the sources of risk and return include:
The illustration in the reading (Jaeger) is: hedge fund manager privately places (invests) in debenture convertible into stock, in a "private equity placement" that allows small companiues to raise equity capital, but importantly, with exemption from registrations requirements, known as Reg D http://en.wikipedia.org/wiki/Regulation_D_(SEC)
The hedge fund gets to purchase at a discount (in the reading example, 15%), which is directly owing to the lack of liquidity (compare to large PublicCo traded shares), but with expectation company will register in 90 days. So that's the essential quid pro quo: shares at a discount, with liquidity/credit risk waiting on registration event. Company registers, investors exercise their conversion rights.
From our notes:
By taking positions in smaller, riskier companies, Regulation D managers earn returns through credit and liquidity premiums. Specifically, the sources of risk and return include:
- Credit risk: companies typically have lower credit quality
- Liquidity risk (perhaps most significant): prior to SEC registration, the position has virtually no liquidity. After the SEC registration, the position cannot be easily liquidated.
- Specific risk: small companies have their own specific risk.
Thanks David !!!
Though you replied to my post almost immediately, It took me some time to digest the concept and hence a late thank you.
Just one more thing. After SEC registration, why can't the fund manager or purchaser liquidate the position easily (as in why he can not sell the shares to the public as in regular share trading)
AG
Though you replied to my post almost immediately, It took me some time to digest the concept and hence a late thank you.
Just one more thing. After SEC registration, why can't the fund manager or purchaser liquidate the position easily (as in why he can not sell the shares to the public as in regular share trading)
AG
Hi AG,
Good question, my summary (to be candid) looks like it may overstate Jaeger's article. Technically, I agree with you, in his example it looks like the investor can sell upon registration. Aside from the fact the deal terms may vary, I think i embellished that comment because we are talking about a relatively large position in a new issue for a small company, so i was thinking about (endogenous) liquidity: as a practical matter, i think it many cases, the investor would not want to exit the whole position quickly without sending the price down. Or, if the investor wanted to exit profitably without price disruption, probably needs to exit piecemeal over time. So, i can't currently find anywhere Jaeger says this, but i sort of still like my embellishment. I could be wrong, i'm not expert on these.
Hope that's helpful.
David
Good question, my summary (to be candid) looks like it may overstate Jaeger's article. Technically, I agree with you, in his example it looks like the investor can sell upon registration. Aside from the fact the deal terms may vary, I think i embellished that comment because we are talking about a relatively large position in a new issue for a small company, so i was thinking about (endogenous) liquidity: as a practical matter, i think it many cases, the investor would not want to exit the whole position quickly without sending the price down. Or, if the investor wanted to exit profitably without price disruption, probably needs to exit piecemeal over time. So, i can't currently find anywhere Jaeger says this, but i sort of still like my embellishment. I could be wrong, i'm not expert on these.
Hope that's helpful.
David
AG,
I just found this section (Jaeger p 88): "as a general rule,once the shares are registered and converted, it will take a month or more to sell the shares in the open market. Experience shows that most Reg D transactions, take all in all, 18 months to five years from the day of closing until conversion and sale of all shares is completed." (as above, i appear to have inferred liquidity plays role even post registration). Thanks, David
I just found this section (Jaeger p 88): "as a general rule,once the shares are registered and converted, it will take a month or more to sell the shares in the open market. Experience shows that most Reg D transactions, take all in all, 18 months to five years from the day of closing until conversion and sale of all shares is completed." (as above, i appear to have inferred liquidity plays role even post registration). Thanks, David
AG - I agree, but FWIW, it's also why i haven't gotten bored with the FRM long after most might, i am critical of the exam methodology is some respects, but it's totally within their scope, and like them to "add reality" as they originate questions from practitioners and vet against textbook (they don't originate from text and vet against practioners). David
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