Profit magazine reports that CEOs listed in their Top 100 Companies find it "very challenging" to raise capital. Instead of spending valuable time trying to find investors, smart CEOs are choosing to outsource this critical task to experts. They know there is higher pay-off to keep focused on their business rather than chase capital pools which they do not know well.
At Loewen & Partners, we serve the owners, CEOs and CFOs of private companies needing financing. We seek to match owners of companies with the right fit of investors who understand the business and can add strategic value.
Over the past decade there has been a significant shift in the sources of financing available to small and medium sized companies and this evolution is useful to understand.
IPOs are Over for Small & Midcap Companies
Historically, one of the most effective ways to finance an emerging enterprise was by means of a small speculative public issue (IPO) aimed at the retail market - the individual investor. This worked as long as the market was in an uptrend and the retail investor was making money. From 1994 to 1999, the Dow Jones Industrial Average rose from 4,000 to over 11,000, an average rate of appreciation of some 25% annually.
Now, however, the great bull market is over. Most institutional investors will no longer consider small cap public issues, and retail offerings cannot be completed without institutional support. Consequently, the small cap public issue market is no longer viable as a source of financing for most small and medium sized companies.
Funds Move to Invest in Private Companies
In the meantime, there has been an enormous increase in the number of professionally managed funds targeted at the private equity market. These funds provide venture capital, mezzanine financing, basic equity, buy-outs and other forms of financing. They invest not only in private companies, but also in private placements in small, illiquid public companies, many of which can no longer obtain financing from the public markets.
Many of the private equity funds are run by independent money managers; some are controlled by corporations or family enterprises, others by financial institutions, some are labour sponsored funds and some are governmental. The net result is that, since the small cap public issue market has dried up, emerging growth companies have turned to the specialized private equity market.
Funds Need Quality Information About Private Companies
The private equity market differs from the public equity market in a number of ways. In the private equity market, information is not readily or publicly available. Yet private equity fund managers must still make informed investment decisions, supported by in-depth research, thorough "due diligence" and analysis of the target company, its assets, markets and key personnel. Each fund has well defined interests, preferred structures, specific investment criteria and a stated mandate. Some small cap companies (listed on the stock exchange) pay to have reports written about them by brokerage houses just to attract interest. Private equity fund managers are extremely selective, typically pursuing fewer than 5% of the opportunities they review.
To tap the private equity market successfully, one must therefore know which funds to approach and how best to deliver the message. Fund managers should be appropriately targeted with a compelling, highly professional, extensively researched investment rationale. Quality, 3rd party independent "due diligence" and presentation is of paramount importance.
Banks are Limited
Since conventional investment banks operate primarily in the public market, they are poorly equipped to service the private equity market. By necessity, these firms segregate their professionals by department and function. Analysis from the research department tends to be independent from corporate finance, and corporate finance must in turn be separated from the rest of the firm by a “chinese wall”. The sales department has a very short-term horizon, selling new issues based on standardized “one-size-fits-all” marketing material and mobilizing only when securities are ready to be placed.
Outsource Your Financing
A small, focused team of experienced corporate finance professionals, such as Loewen & Partners, is best suited to capitalize on and serve the needs of the private equity market. The private equity manager wants to work with an agent with our skills, who will not only manage the presentation and placement process, but will also address independent "due diligence" concerns, research requirements and transaction structuring, all of which may be complex.
Instead of taking a year to find money, with your eye off the ball and the often demoralizing presentations to inappropriate investors, business owners can outsource their financing needs and be confident that they are matched with the right investors at the best price. |
