Monday, July 16, 2007
Here is a true story:
In 1980 Apple Computer famously went public. At the time, blue sky laws in each of the fifty states had yet to be preempted by Congress. Thus, any nation-wide initial public offering was required to qualify under the rules of each state in order to sell shares to the residents of that state. This typically encompassed the filing of an offering document with the state regulator and hoping for a timely approval by them. However, the Apple Computer offering was not only considered to be a "hot" one, but because the computer was such a new technology, it was also considered to be a very "risky" offering. Accordingly, the securities regulators in Massachusetts banned the offering, and Apple avoided Illinois, Michigan, Missouri, and Wisconsin due to almost certain denial. The reasons cited by the regulators for their position was the undue risk of making an investment in Apple Computer.
I thought of this story and the SEC last week as I read the Dealbook entry: In Hedge Fund I.P.O.’s, Shades of Pets.com? Not Really. According to Dealbook, the phenomenon of fund advisers going public is no Pets.com redux since fund advisers are more mature and less risk-taking these days:
The latest hedge fund to go public is one of a breed of large, institutional firms that seem to be more focused on gathering assets and delivering stable but unremarkable returns with low volatility — fewer dramatic moves one way or another — than swinging from the chandeliers like George Soros taking on the Bank of England.
Hedge fund advisers may or may not end up like Pets.com though they certainly (and unfortunately) will not have a sock-puppet mascot. But the truth is that these advisers, like Pets.com or Apple, all bear risk that is probably much higher than an initial public offering of a manufacturer or other traditional industry company. Ultimately, the underlying theme embodied in Dealbook's post is the appropriateness of all of these investment for retail investors. Here, the question is who will make that choice -- securities regulators or the individual investors. The securities regulatory regime we have today largely leaves this up to investors -- I believe this is the right call provided investors are given the proper tools to assess such risk. The alternative is to end up with a slippery slope and a political process which leads to prohibitions like that of Apple. But despite this, the SEC still irrationally clings to the idea that some investments are still too risky for investors. Thus, hedge and private equity funds are off-limits. This is no different than banning Apple in the 1980s (and irrational too -- if the adviser can go public why not the fund itself?). And that I believe, is the moral of this story.
By the way, the split-adjusted ipo price of Apple is $2.75. It now trades at about $138.