KKR and Fidelity Doing an End Run Around the I-Banks

As many of you know, I've felt for some time that the IPO market has remained in the doldrums largely because of the incompetent, corrupt and oligopolistic management of the process by investment banks.

This can be attributed to both the regulatory environment, which has justified very limited IPO distributions to retail investors on the grounds that there's less liability with institutional clients such as mutual and pension funds, and the argument that retail investors are more likely to "flip" (immediately sell) the shares they receive.

The evidence of the latter is scant (there's no way to track it, as institutions immediately transfer the shares they buy from brokerage firms to custodians elsewhere), but the circumstantial data strongly suggests that institutions are among the worst flippers.

This monopsony (opposite of monopoly) of institutional investors probably has been driven by a quid pro quo with brokerages where IPO allocations are driven by a willingness to pay more for standard brokerage transactions that could be conducted elsewhere far more cheaply.

The limited number of buyers has (in my opinion) probably created a false sense of lack of demand by investment banks, when it's really a result of the financial crisis, against a backdrop of secular decline in mutual funds (to ETFs) and pension funds' eschewing of any risk in the wake of Madoff. Individual investor interest in speculation hasn't declined as much as many believe, as evidenced by the growth in leveraged ETFs and other speculative retail products.

Probably in response to the success of firms like SharesPost, Second Market and Advanced Equities in selling shares of private companies to individual investors, KKR, the well-known private equity firm, has decided to start a marketing process through Fidelity Investments - essentially doing an end run around investment banks and selling shares directly to smaller investors.

Expect a great deal of consternation about this from various parties that are "concerned about the risks to smaller investors", but who are really shills attempting to protect the investment banks' monopoly. If this works, it will represent a significant first step in how funds are raised. In many respects this will be a return to an earlier era (pre 1990s), where retail played a much greater role in IPO distribution.

I see this as an extremely positive development, from both the perspective of an advisor with clients who are looking for liquidity from their "perpetually pre-IPO" company shares and who is looking for long-term investment opportunities from these new companies.