Advanced Equities gears up to go public

Advanced Equities Financial Corp., a Chicago-based securities firm that has carved a niche of financing companies backed by venture capital firms, is preparing for an initial public offering. In anticipation of an IPO late next year or in 2010, the firm is hiring Wall Street veterans to raise its profile and build its wealth management and retail businesses, said Joel Marks, the company's vice chairman and chief operating officer. Its latest key hires are Frank Campanale, a 32-year veteran of New York-based Smith Barney who founded and ran its investment consulting business, and Scott Umstead, a 25-year veteran of Merrill Lynch & Co. Inc. of New York who oversaw its Northeast district. Mr. Umstead is joining the company as national sales manager and Mr. Campanale will head its wealth management division.
Mr. Campanale, who said that he had been about to start a job at a wirehouse that would have been comparable to the position he left at Smith Barney in 2004, said he was lured to Advanced Equities by an equity stake in the firm. "When it goes public, it's going to rock," he said. Mr. Campanale plans to create a family office within Advanced Equities to serve the ultra-affluent who buy its private equity offerings. In the process, he may attract many high-end advisers he has come to know over the years. In anticipation of its IPO, Advanced Equities has raised $10 million from GKM Newport Generation Advisors LLC of Los Angeles, a private equity firm, and additional capital from Sequoia Capital and Kleiner Perkins Caulfield & Byers, venture capital firms that are based in Menlo Park, Calif. Advanced Equities also has retained Keefe Bruyette & Woods Inc., a New York investment bank. Advanced Equities has grown from $3 million in revenue in 1999 to $300 million in 2007, and expects to reach $450 million in revenue this year, said Keith Gregg, chief executive of First Allied Securities Inc., a San Diego broker-dealer owned by Advanced. Other broker-dealers owned by the firm are Greenbook Financial Services Inc., also of San Diego, and FFP Securities Inc. of Chesterfield, Mo. Combined, they represent a sales force of 1,000 brokers. As a result of its record, Advanced Equities ranked 11th among Inc. magazine's 500 fastest growing companies in 2006. The core of Advanced Equities' business involves raising capital for companies that are owned largely by venture capitalists and are positioning themselves for an IPO — a position not unlike its own at the moment. In the past, companies generally could go public when their revenues reached about $50 million. Today, the hurdle is about $200 million in revenue, which means they often need equity funding beyond that provided by venture capitalists in order to reach the level where they can tap public markets. Advanced Equities became a power in this niche when the tech bubble crashed in 2000 and investment banks — including Hambrecht & Quist, Robertson Stephens and Montgomery Securities, all now defunct or absorbed into larger banks — stopped supplying bridge financing to late-stage venture-backed companies. By providing critical funds when others didn't, Advanced Equities gained the trust and loyalty of top venture capital firms, said executives at those firms. Last year, Advanced Equities raised $800 million from accredited investors for such companies and expects to raise as much as $1.5 billion this year, Mr. Gregg said. Most of the capital is raised by Advanced Equities' 75 captive brokers, although about 300 independent reps under the Advanced Equities umbrella have taken part, he added. The firm's ability to offer chunks of first-tier venture deals has given it entrée to America's superrich — including 50 of the Forbes 400 wealthiest people in the United States, Carl Icahn among them. It was partially this access to wealthy clients and prospects that attracted Mr. Campanale. "It's why Goldman Sachs [Group Inc. of New York] was so exciting in 2000 during the IPO craze," he said. "They would go to high-end clients and say: look what I've got" in terms of private equity destined for an IPO.

SEC MAY LOOK ASKANCE

But this kind of pre-IPO activity on Wall Street led to trouble with the Securities and Exchange Commission, said Robert Ellis, a New York-based analyst with Celent Communications LLC of Boston. "The SEC hates favored treatment for IPOs," he said. Hypothetically, an investment bank could refer big retail clients to Advanced Equities to purchase private equity stakes, Mr. Ellis explained. In turn, that investment bank gets chosen for the IPO by the company that Advanced Equities helped, he continued. "Have you just rearranged the deck chairs?" Mr. Ellis asked, questioning whether Advanced Equities' involvement actually eliminates a potential conflict of interest. But this is not an issue for Advanced Equities, said one investor in the broker-dealer who asked not to be identified. "If you're steering it to your best clients, it's one thing," he said. "But they're opening it to everyone who is an accredited investor. At Goldman, it was alleged to be quid pro quo." E-mail Brooke Southall at bsouthall@investmentnews.com.