JOBS Act Helps Hedge Fund Raise Money Through Widespread Advertising

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A good rule of thumb is never to reason from an acronym but here's this Bloomberg article about how Dan Loeb's Third Point Reinsurance is making use of the JOBS Act in its IPO even though it creates no JOBS in America so hahaha irony. It's not entirely clear what Third Point Re is doing to take advantage of the JOBS Act - it filed its initial draft prospectus confidentially, and it's being a little coy about its plans for financial disclosure and internal-control certification. Nor is it clear who is harmed by these potential omissions, or how; the main harm seems to be a devaluation of the acronym which I guess is a thing? How will we ever be able to trust an acronym again? Next you'll tell me the PATRIOT Act is unpatriotic.1

Of course the point of the JOBS Act was not to create jobs, which you can tell because (1) it begins with the words "An Act To increase American job creation," which is pretty suspicious, and (2) it otherwise has nothing to do with jobs, there are no requirements for employees or hiring or anything in it, it's just the name, not even the name, the name doesn't mention jobs, just the acronym, honestly.2The point of the JOBS Act was to make IPOs easier and it seems to have worked, with IPO activity increasing and with the majority of recent IPOs done by the "emerging growth companies" rightly or wrongly protected by the JOBS Act.3 One lesson here is "if you build a rule to provide special favors to some group of people you like, some jerk you don't like will find a way to take advantage of it," but honestly that's a lesson they should teach in regulatory kindergarten, you didn't need Dan Loeb for that.

You might recall that the other purpose of the JOBS Act was to make it easier for hedge funds to attract capital, insofar as like half the JOBS Act was about letting hedge funds advertise so that they, and Dealbreaker, could raise more money.4 And that is ... well that's not what's going on here, in that Dan Loeb isn't raising money for his hedge fund by advertising widely and then accepting money only from accredited investors pursuant to the eased general-solicitation rules under the JOBS Act. But what is going on is that Dan Loeb is raising money for his hedge fund by advertising widely and then accepting money from everyone, by wrapping a bit of his hedge fund in a reinsurance company. And by making it reasonably clear that what you're getting is the hedge fund:

We are a Bermuda-based property and casualty reinsurer with a reinsurance and investment strategy that we believe differentiates us from our competitors. Our goal is to deliver attractive equity returns to shareholders by combining profitable reinsurance underwriting with superior investment management provided by Third Point LLC, our investment manager.

Our reinsurance strategy is to be highly opportunistic and disciplined. During periods of extremely competitive or soft reinsurance market conditions we intend to be selective with regard to the amount and type of reinsurance we write and conserve our risk-taking capital for periods when market conditions are more favorable to us from a pricing perspective.

Substantially all of our investable assets are managed by our investment manager, Third Point LLC, which is wholly owned by Daniel S. Loeb, one of our founding shareholders. ... We directly own our investments, which are held in a separate account and managed by Third Point LLC on substantially the same basis as its main hedge funds, including Third Point Partners L.P., the original Third Point LLC hedge fund.

That is a delightful passage! Obviously a lot of what it says is "we invest with Third Point and Third Point is good at investing," but the key passage is really the stuff about "be[ing] selective with regard to the amount and type of reinsurance we write and conserv[ing] our risk-taking capital." That means "we're not really a reinsurance company, we're a tax dodge and a way to raise permanent tax-advantaged capital for the hedge fund without exposing it to a ton of reinsurance risk." The reinsurance strategy is (1) have a lot of money, (2) invest it in Third Point, and (3) try not to do too much reinsuring. The differentiating factor in their reinsurance strategy is not writing a lot of reinsurance.5

Is that the purpose of the JOBS Act? Oh I mean surely not, right? The goal was to make it easier for hedge funds to seek out accredited investors through broad advertising, not to make it easier for them to seek out unaccredited investors by IPOing their reinsurance wrappers. But, of course: they could do the latter with or without the JOBS Act. The JOBS Act just makes it a little administratively easier. So why shouldn't they take advantage of that?

Loeb’s Reinsurer With No U.S. Staff Gains From Jobs Act [Bloomberg]

1.On the other hand I will believe to my dying day that the Tick Size Flexibility Act of 2013 is about the bugs.

2.Let's read it. I count:

  • Two uses of the word "job," both in nonbinding title-and-exhortatory provisions, and
  • Five uses of words starting with "employ*," one of which is actually a little related to encouraging employment at startup companies. It's section 502, which says that for purposes of deciding if a company has enough shareholders to force it to go public, employees who got stock in employee-benefit plans don't count as shareholders. But, notice: that's about job-creating startups not having to go public. Not about them going public.

3.Speaking of wrongly, here is another Bloomberg article that asks the reasonable question "who in heaven’s name thought that it was a good idea to make IPOs easier in the first place?" I mean Barack Obama, is an answer, and a bunch of senators and stuff, but that aside it's not an unfair question: the argument is that early-stage (measured by sales) IPOs underperform the market rather drastically, while later-stage (high-sales) IPOs do reasonably well, so why inflict more early-stage ones on unsuspecting public-market investors? I dunno, you can tell them that and let them decide not to buy those IPOs? It'd be interesting to live in a world where the SEC forbids products that underperform the market. As opposed to the current world, where if forbids the ones that outperform the market.

4.I'm sort of kidding, the general-solicitation rules were about operating companies as much as they are about hedge funds, but it's still a little funny to find Barry Ritholtz saying this to Bloomberg:

“This was all about small companies and startups, not wealthy hedge-fund managers,” Ritholtz said in a telephone interview. “Was this anticipated by the JOBS Act? Well, not if you paid attention to the rhetoric we heard.”

Well, yes if you paid attention to my rhetoric. My one-sentence summary of the JOBS Act has alwaysbeen "the JOBS Act requires wealthy hedge fund managers to advertise on Dealbreaker" and so far I have heard no convincing counterargument.

5.Which differentiates them from most reinsurers but not so much from other hedge-fund-run reinsurers:

[John Paulson's] Pacre sold about $8 million of reinsurance coverage from April to December, or 1.6 percent of its $500 million in initial shareholders’ equity. That’s far below the average of 47 percent for 15 publicly traded Bermuda insurers during their most recent nine months.

Cohen’s and Loeb’s reinsurers employ underwriting staff and have set targets of insurance sales equivalent to 30 percent and 19 percent, respectively, of their equity in their first full year, according to disclosures to reinsurance brokers.