The window is open for smaller middle market private companies to obtain capital from private equity funds. The former cutoff of $5 million EBITDA to get interest from private equity firms seems no longer in place. Smaller firms with less than $5 million of EBITDA are attracting interest.
If your smaller middle market company would benefit from additional equity capital, now may be the time.
Dennis McCarthy – (213) 222-8260 – email@example.com
Today, a small cap public company considering raising equity may find the alternative of using a PIPE, a private investment in a public entity, to be a more attractive option.
That’s my conclusion from the 2012 tally of PIPE investors by Placement Tracker, the well-regarded source of this data.
So, here’s the background. When I created my Equity Series of videos to help small cap public company executives to better understand the options available to them when raising equity, I created a video on PIPEs.
In my video, I said that because a PIPE is a private investment, historically, hedge funds have been the primary investors, not the larger universe of traditional institutional investors which typically invest in public securities.
Hedge funds invest in PIPEs but negotiate terms that are expensive for the issuing company.
PIPEs, therefore, have come to be considered a relatively more expensive method for a small cap public company to raise equity vs other offering alternatives.
This year, 2012, however, reveals an interesting development. In the 2012 PIPE investor tally, produced by Placement Tracker, 10 of the top 25 PIPE investors were not hedge funds but more traditional institutional investors.
In fact, the number one PIPE investor is a traditional institutional investor, Fidelity Investments.
So today, a small cap public company’s PIPE may be sold to a larger universe of investors including those traditional institutional investors which purchase stocks on more favorable terms, such as investing at the market price without a discount and without other sweeteners such as warrants.
This is a positive development and makes the option to raise equity through a PIPE offering more attractive. I hope this trend continues.
I’ve included a link to the online magazine, Growth Capitalist, which first tipped me to this development. Also, I’ve provided the 2012 PIPE Investor tally from Placement Tracker as well as the link to all its 2012 tables.
As always, please contact me to help your company to raise equity or to complete any capital market project.
Dennis McCarthy – (213) 222-8260 – firstname.lastname@example.org
We’re seeing a surge in inquiries by significant shareholders at small cap public companies who are considering a sale of their shares before their tax rates rise at year end.
In 2013, the capital gains tax rate along with the Medicare element is expected to result in an effective tax rate of 23.8% for higher income individuals from 15% today, almost a 60% increase.
We can assist your shareholders in completing stock sales yet this year before the tax law changes.
Monarch Bay’s experienced professionals can assist your shareholders with registered secondaries, block trades or dribble out programs to fit your shareholders’ goals and the situation.
We’re also pleased to announce the addition of several highly experienced institutional salesmen to the Monarch Bay team. Our expanded team will help complete these year-end stock sales plus help increase institutional awareness well into the new year.
It’s important to get on this right away. There’s not much time left this year.
Please contact me to discuss your shareholders’ stock sales or any capital market projects.
Raising equity capital for smallcap companies, defined as companies with market values $2 billion or under, has gotten easier because of techniques like shelf registrations which permit overnight offerings and ATMs or at the market dribble out financings.
However, raising capital for the microcap end of the public market, defined as companies with market values of $100 million or less, hasn’t gotten much easier, in my opinion.
It could be several factors, fewer microcap investors, generally lower liquidity or other causes.
This is a problem because many microcap companies need capital to grow. If capital is too expensive or not readily available, it stifles their growth.
Therefore, when my firm helps microcap companies to raise equity, we often include less conventional sources of capital in the mix.
In addition to the hedge funds which have been the main source of capital for microcaps, we often approach three additional sources:
(i) strategic investors,
(ii) private equity crossover funds and
(iii) wealthy individual investors.
These sources may not be as speedy but they may offer better terms.
First, strategic investors. Many large companies have lots of cheap capital available but need growth. This has opened the door for microcap companies to obtain capital from strategic investors.
What strategic investors want from the investment will vary, maybe it’s a co-marketing arrangement or a technology license, but they typically don’t want to consolidate the microcap’s performance in their financials.
The key point here is that the strategic investor is expecting to get a return in ways other than those of traditional financial investors. This creates some interesting opportunities. For example, I’ve seen several recent strategic investments made at a significant premium to market.
The second group of investors are called private equity crossover funds. Because the competition among private equity groups is so intense, some private equity funds have taken to making investments in public companies.
It’s important to distinguish these private equity crossover funds from classic hedge funds. These crossover funds look at different metrics. They look at IP position, capital efficiency and size of addressable market, and less at current profitability and liquidity.
Private equity crossover funds take a longer term view more in sync with corporate management.
The third group is wealthy individual investors. These are the ones who survived the Great Depression with capital so they’re savvy investors, survivors.
They seem to come in two types, passive or active.
The passive investors know they don’t have time to closely monitor their investment so they may appoint or hire someone to help them. In a recent example, individual investors selected a representative to review documents and serve as their eyes and ears.
The other type of individual investor, the active investor, may serve as a board member and company mentor. The active investor’s perspective is that he provides capital and advice, combined.
I suppose I should mention that we may see a return of the old style passive individual investor, investing very small amounts of capital in higher risk situations. The recent crowd-funding legislation may spark the return of that style where an individual investor’s stake is so small in relation to his net worth that the complete loss is not too painful. We’ll see how the new rules are drawn and what develops here.
In summary, we think it pays to include these less conventional capital sources to get your capital on the best terms.
Please contact me to help your company raise equity or debt or complete an M&A project.