New Dot-Com Party Not Strictly Social

Deal makers see traditional and clean-tech firms leading the next wave, and social media offerings may be part of the mix.

By Ken Tarbous
January 22, 2010

For a while now, Wall Street has been buzzing about the possibility of a sequel to the dot-com IPO boom of a decade ago. The question is — if it does materialize — what will it look like?

Names like Facebook, Twitter, and LinkedIn have been suggested as candidates for an initial public offering, but this new generation likely won't be relegated solely to social media startups.

Deal makers say possible candidates include semiconductor makers and information technology firms that will be touted for their traditional business models and valuation methodologies.

Any notable uptick in IPOs likely will be welcome at Wall Street investment banks, where new-issue activity has dramatically dropped off amid the credit crisis and other sources of fee income like securitization have fallen as well.

"The companies ... are going to be cash-flow generators ... that are profitable, companies with real products, from communications to internal resources making systems work better, not just dot-coms with sites trying to generate advertising revenues," says Lee Graul, partner at the BDO Capital Markets.

A recent survey of investment banks conducted by BDO Capital Markets found that market participants overwhelmingly expect the technology sector to dominate IPO issuance this year.

"Clearly, the interest in and the supply of technology IPOs is high and getting higher. We've had two years of a dry spell," says Cully Davis, head of technology equity capital markets at Credit Suisse.

As Davis sees it, "A lot of companies are still out there innovating and they need capital to grow. On the buy side, especially technology investors who manage growth funds, we see investors who are starved for significant growth opportunities."

Surpassing last year's total of tech-related IPOs doesn't appear to be too difficult a feat considering there were nine U.S. tech IPOs in 2009, with proceeds of $3.464 billion.

In 2008 the drought was more extreme: there were a mere three tech IPOs with a value of $749.2 million, according to data from Thomson Reuters.

Deal makers have to go back three years to 2007, the last robust tech IPO season. In 2007, 43 U.S. tech IPOs valued at $7.651 billion were completed, according to Thomson Reuters.

The drop in IPO volume has had an impact on investment bank earnings in recent years.

The overall disclosed IPO fees for Goldman Sachs dropped from $395.7 million in 2006 to $171.7 million in 2009, according to Thomson Reuters.

Bank of America Merrill Lynch, which topped the 2007 league tables for overall disclosed IPO fees with $346.4 million, saw its fees drop to $140.1 million in 2009.

"There's been stiff competition for assignments, so fees have gone down but those fees will come back up again. The issuers have been in control but by the end of 2010 the banks will be in control again, and fees will reflect that," says Hugh Johnson, chairman and chief investment officer at Johnson Illington Advisors, a money management and advisory firm based in Albany, N.Y.

The competing investment banks have broken into two groups, the larger companies with commercial banking arms, and a second level of boutique banks that are extremely performance-oriented and populated with bankers who have migrated to boutiques because of questions and concerns over compensation, Johnson says.

Over the past several years banks have profited from the interest rate environment. But as rates start to climb, banks are forced back to the basics of traditional investment banking.

"That side of the ledger is attempting to do a number of things aggressively, using their capital to make money trading stocks, bonds, commodities, you name it," Johnson says. "They're also doing more of the traditional roles of investment banking. It's clear that they're really focused on the investment banking side. The commercial banking business stinks. The investment banking business is starting to come back to life."

Any dramatic — and regular — return of IPO issuance would likely be most welcome among venture capital firms that need to recoup their investments in startups.

In recent years, many venture capitalists have had to resort to mergers and acquisitions as a way to cash out of their investments because they could not rely on bringing their companies to the public markets.

"There's been a lot of hype on this, the sudden opening of the IPO market," says Mark Heesen, president of the National Venture Capital Association. "Unfortunately, you have to look at the numbers. Was there an increase in registration in December? Yes. Is that a good sign? Yes. Is this a new era in IPOs? I'm not ready to go that far yet. I have been hearing this for six months now that [banks are] pushing work away."

BDO Capital Markets' Graul adds that "a lot of technology companies ... have been prepared to go to market by venture capital firms and private-equity firms who haven't been able to exit because of the market."

In what may be a recognition of larger changes in the broader economy, deal makers say the next wave of tech companies likely will include clean-tech businesses.

Codexis, a maker of enzymes used in biofuels and based in California, and China-based Jinko Solar Holding, a solar cell manufacturer, are among the clean tech companies that have registered in the past month for IPOs.

Many of these companies have benefitted from the tremendous amount of money coming from government initiatives, according to Credit Suisse's Davis.

Nearly two dozen well-positioned firms, fitting into a wide definition for tech companies and held by financial sponsors or venture capital groups, are waiting for equity markets to strengthen further as they prepare to go public, market participants say.

Still, some bankers contend the market will be excited to see IPOs from the broader digital media group, which would have an appeal to a broader audience of retail buyers because the likes of Facebook and LinkedIn are well known.

"We anticipate digital media to be the first and most active in the marketplace," says Johnny Williams, head of technology equity-capital markets at Bank of America Merrill Lynch, who is based in Palo Alto, Calif. "Additionally, we expect an even spattering among communications equipment, clean technology and software, and a somewhat lesser degree of activity in the semiconductor and services companies."

Fewer Seeders Around, But Hedgies Love Them

Startup hedge funds want to avoid the time and costs associated with hiring marketing professionals and that's where seeders come in

By Ken Tarbous
November 20, 2009

Hedge funds are not back to where they were before Lehman Brothers' bankruptcy, but some investors have returned and former Wall Streeters who think they have interesting investment ideas still want to hang out their own shingles.

To do so, these upstart funds are increasingly ready to give up a percentage of equity to specialty firms known as seeders that provide services such as marketing and distribution.

The capital available from seeders is a fraction of what it was just a few years ago and the number of specialty firms willing to back startups is off substantially, according to industry reports. But any help from these seeders remains welcome for hedge fund managers like Tom Grossman, who worked at Goldman Sachs in the early 1990s on the firm's international sales and trading desk.

"Accepting the seed capital was a good idea," says Grossman, principal of Union Avenue Advisors LLP, which opened its doors last year. "It was easier and faster to get to market."

Grossman partnered with New York-based SkyBridge Capital to forgo the costs of building a marketing infrastructure — which his seeders already had — and take advantage of additional existing due-diligence and risk-management teams made necessary by increased investor scrutiny.

"Post-financial crisis, the landscape has changed drastically in [that] the amount of infrastructure and investment [needed] to build a fund is way up," Grossman said. "Before they're going to attach their name to a hedge fund, they're going to do an incredible amount of due diligence."

He views the arrangement as a "true seeding relationship" that strengthens the marketability of his fund. "It's a great comfort to have mature investment professionals who are true partners of the business and not just investors," he said "The seeding role helps [and] adds a layer of comfort for investors."

Prior to starting up Union Avenue, Grossmann started the SAC International Equities fund and his own APC Fund at Aeneas Capital Management.

Scott Prince, managing partner at SkyBridge Capital, believes that today's challenging fundraising environment is a contrast to the 2003 to 2007 period, when raising capital was a seemingly effortless task. SkyBridge owns a piece of the revenue for each investment it makes, and though it has seen an increased demand for capital from emerging managers over the past year, seed capital for hedge funds has become a scarcer resource.

According to New York-based Acceleration Capital Group, a division of Arcadia Securities, the amount of aggregated hedge-fund seed capital available for investment in third and fourth quarters of 2009 dropped to $1.31 billion from $2.35 billion in the first half of 2009. That's a big drop from $7.51 billion available in the latter half of 2008.

Acceleration Capital tracks a pool of 100 hedge fund seeders globally for its Seeder Demand Research. It found that 19 have left the business, while 35 are not currently backing startups. Meanwhile, 14 firms are actively seeding hedge funds while 27 are opportunistically seeding. Five new seeders have come into the market.

For the past 18 months the number of new hedge funds coming to market was down significantly from where it had been three to four years ago, says Anita Nemes, global head of capital introductions at Bank of America Merrill Lynch. Since July, though, the space has been more active as large seeders are returning to make deals putting seed capital with emerging hedge funds. Along with the increase in activity, she estimated that the median deal size has grown from $25 million three years ago to $75 million this year.

With a dearth of capital in the marketplace, seeders are taking advantage of a vast talent pool of emerging managers across the globe. With all the choices, though, they are more selective about where and with whom they invest, doing more due diligence and looking at managers' pedigrees, market participants say.

"It depends on who you are and if you are established and are very strong, that can definitely attract capital, and if you don't have a strong track record, it is more difficult to attract capital," says Michael Gray, head of fund formation and investment management practice at Chicago law firm Neal Gerber Eisenberg LLP. Gray has served as counsel for hedge fund managers and investors.

In addition to being more selective about where and with whom to put their money to work, investors also are exercising their new-found ability to demand better terms from emerging hedge fund managers. But there's no plain-vanilla form of a seed deal, and the terms are specific to each situation.

"Obviously, right now the supply-demand imbalance means seeders have a big advantage negotiating deals," Nemes says. "The majority of seed deals have been negotiated via revenue sharing agreements, however, due to increasing supply and lack of demand from traditional day one investors, active seeding firms have been able to negotiate more favorable terms throughout 2009."

Evolving deal structures such as changes to lock-up periods — some of which have shrunk to as little as two years — seed amount, length of capital commitment, the percentage of management or participation fees seeders get, for example, depend on how strong the proposition is and track record of the managers, Nemes says.

When it comes to deal terms, SkyBridge's Prince — who said even the big established hedge fund managers are having difficulty finding new capital — has seen deal-making dynamics change.

"There has been a new level of scrutiny by investors of hedge fund managers," said Prince, a former partner at Eton Park Capital Management and co-head of equities trading and co-head of global equity derivatives at Goldman Sachs until 2004. "There has been a shift of power between investors and hedge fund managers."

Bond Buyer Gives Nod to Dulles Project

Investment Dealers' Digest
December 4, 2009

Annual awards salute novel deals in the world of municipal finance

By Ken Tarbous

This week some 200 muni finance specialists came together to honor the best and brightest in The Bond Buyer's 8th annual "Deal of the Year" awards at the New York Academy of Sciences in Lower Manhattan.

The winner of the top award was a transaction that will help finance the extension of rail service to Washington, D.C.'s Dulles International Airport from the nation's capital. Talk among attendees focused on the positive role the municipal finance market plays in creating and maintaining the nation's public institutions, especially striking in a year when most every level of government in the U.S. has been broadly criticized for its spending and budget deficits.

"Public finance is essential to America. It supports schools, builds infrastructure, and helps develop communities," Robert Tucker, a managing director in fixed-income investor relations at bond insurer Assured Guaranty, told IDD.

The Bond Buyer's Deal of the Year went to the Metropolitan Washington Airports Authority's $963.29 million Dulles Toll Road project.

The MWAA has a concession to run the Dulles Toll Road and the project uses the revenue to fund the first phase of a 23-mile extension of the Dulles Corridor Metrorail to parts of Virginia and to connect the airport to downtown D.C. as well as other capital improvements. "We were an airport operating a toll road to build rail," said Andrew Rountree, deputy CFO of the authority. "Oddly enough, we waited 47 years for the worst economic downturn to make this dream happen."

Dulles airport was dedicated by President John F. Kennedy back in 1962.

The MWAA deal involved a unique mix of capital improvement bonds, capital appreciation bonds, and Build America Bonds in capturing the revenues of an existing toll road to finance a transit project.

More than 60 transactions, ranging in size from a few million dollars to hundreds of millions, priced between Oct. 1, 2008, and Sept. 30, 2009, were nominated for the 2009 awards.

The federal government was presented with an award for market-changing innovations, including Build America Bonds (BABs) and Qualified School Construction Bonds (QSCBs), created under the American Recovery and Reinvestment Act.

Among the finalists was the District of Columbia, which saw a turnaround since the 1990s when it was saddled with a junk rating and operated under the supervision of a federal financial control board. The district's $801 million deal was backed by income tax revenue and garnered double-A and triple-A ratings.

"Ten years ago the district was a joke on Wall Street. I don't think we would have made it to this event, even as doorkeeper," said Natwar Gandhi, D.C.'s CFO.

Recognizing the people in the public and private sectors who contribute to the greater good is important, attendees said.

"It's a great opportunity, in a difficult economic environment, to celebrate the efforts of the professionals whose hard work benefits the municipalities and serves the investors' needs," said David Safer, vice president at BNY Mellon, who worked as bond trustee on several of the deals recognized by The Bond Buyer.

The awards program raised $5,000 for Smile Train, a charity providing cleft lip and cleft palate surgery to children in need around the world, and it marks the beginning of the season for deal awards. After all, The Bond Buyer's sister publication IDD has its own deal of the year awards and the submissions deadline is Dec. 18.

Deal of the Year finalists were selected from The Bond Buyer's designated U.S. regions in large and small issuer categories determined by most recent fiscal year gross revenue of the issuer or the entity financed. Issuers in the small deal category include those with annual revenue of $70 million or less, or beneficiaries with those revenue levels in conduit deals. Large deals were those above $70 million.

Psst. Wanna Buy a Mid-Market Boutique?

November 5, 2009

By Ken Tarbous

CIT Group looked to remodel itself with the purchase of a middle-market investment banking boutique two years ago, but now that the finance company has filed for bankruptcy the fate of the business unit is uncertain, leading some insiders to speculate that the boutique's original founders may try to buy it back.

That boutique, Charlotte, N.C.'s Edgeview Partners, has lost some key deal makers because of uncertainty at CIT and some insiders believe that the bankruptcy and a steady trickle of news about the firm's financial travails have made it tougher for the M&A firm to snare advisory assignments.

Edgeview managers began shopping their firm looking for potential buyers, and as recently as last month insiders were trying to "liberate" Edgeview from CIT, according to a banker who has done business with CIT and Edgeview but did not want to be named.

CIT resisted the idea of selling Edgeview, to the partners or anyone else, and in February Edgeview founding members Matt Salisbury and Drew Quartapella left the firm.

"I'm certain that they'd like to see this taken out of CIT, not as part of a sale [to a third party], but as an independent entity," a market participant with knowledge of the situation said.

Spokesmen for CIT and Edgeview declined comment. And CIT made clear in a presentation to creditors that Edgeview has a role in the lender's future, and it's not entertaining offers for the boutique, say market participants.

But others suggest the attraction of a sale is too strong for Edgeview's bankers and creditors of CIT, which aims to get through its bankruptcy in 30 to 40 days.

When Edgeview's founders sold their mid-market bank to CIT in July 2007 few details about the transaction were published, but a former employee estimates the cost at $55 million.

CIT is the latest casualty of the credit crisis now in its third year. The company has not had full access to credit markets and it has buckled under a heavy debt load. The banking boutique, say market observers, faces what typically happens during a restructuring to operations not related to a core business: they are jettisoned, either sold or shut down.

But market participants familiar with the situation say that discontent within the banking boutique's dealmaking team grew quickly in the first six months of Edgeview's marriage to CIT.

A deal to extricate Edgeview from CIT may have been delayed by complications tied to CIT's financial difficulties. Its bankruptcy filing on Sunday, though, could clear a hurdle to a sale. With few Edgeview assets to sell, and in the context of the bankruptcy workout amid the current economic climate, it would be unlikely that CIT's bondholders and new managers would want to keep the banking boutique. It makes sense that Edgeview's own professionals would be the preferred buyers, and remaining payments related to the structure of CIT's Edgeview acquisition favor a buyback arrangement, one observer said.

Edgeview's situation has been likened to what Richmond, Va.-based Harris Williams went through after Sirrom Capital picked up the advisory firm in 1995 for approximately $24.5 million. When Finova Group bought Sirrom, Harris Williams bought back control in 2000, just a year before Finova went bankrupt. PNC Financial acquired Harris Williams in 2005.

But in CIT's case, questions still linger about whether it was the right play for the lender to get into the midmarket M&A advisory arena in the first place. Under Jeffrey Peek, CIT aspired to be something more than just a century-old lender to mid-level businesses, starting up its own internal M&A group in March 2005.

In addition to branching out into M&A advisory work, CIT's new management got into the student loan and home-equity loan finance businesses.

When CIT encountered difficulty in building a market presence in the world of M&A advisory work, the lender acquired Edgeview and looked to use its own lending business as a source of assignments in cross-selling efforts, a banker with knowledge of the situation said.

"The best way to make inroads was to buy an existing platform, but it was a major departure from their hallmark and franchise business," a former CIT employee who declined to be named said.

Edgeview has closed more than 300 midmarket transactions in its eight-year history, according to the company. In 2006, Edgeview advised on deals with total enterprise value of $2.5 billion, according to published reports.

There are examples, though, of early success for the middle-market banking team after it was snapped up by CIT.

Edgeview helped family-owned food processor and distributor Michael's Finer Meats and Seafoods of Columbus, Ohio, track down private-equity investors who would be willing to help fund its business expansion. Edgeview linked Michael's with Sorenson Capital in a deal that closed in early 2008. CIT arranged the financing for the transaction.

But for the past year or so, Edgeview's connection to CIT may have hampered it. M&A deal flow this year is generally off from last year and credit conditions still have not thawed enough to allow for much in the way of leveraged buyouts. But CIT's woes have been well documented and this likely impeded the investment banking team's ability to attract new M&A assignments from companies with enterprise values up to $300 million, says a banker who has done business with CIT and Edgeview said.

Amid all the tumult, though, a source within Edgeview said that the banking boutique's dealmakers did close a divestiture of a building products company last week — just days before the CIT bankruptcy filing. And there are other deals in the pipeline, the source said.

"We're not completely at stand-down here, but at the same time we're also cognizant that our deals and deal flow is being hampered by the connection to CIT," the Edgeview professional said.

In addition to problems related to the CIT bankruptcy, the exodus of talent does not bode well for Edgeview's business either, observers say.

Former Edgeview managing director William A. Morrissett, who had run the defense, aerospace, and homeland security practice and assumed much of Quartapella's and Salisbury's responsbilities after their departures, left Edgeview in the summer. Gregg Smith, who had been CIT's man responsible for the advisory firm, has moved to Conway MacKenzie, where he is a senior managing director in the turnaround specialist's New York office.

The high-level departures and defections of cornerstone talent from Edgeview is a telltale sign that the shop faces problems staying focused on attracting and serving clients, a banker who has done deals with Edgeview said.

"That really tells you about their ability to get paid," he said.

But Bill Hobbs, a managing partner at private-equity firm Carousel Capital, which has hired Edgeview as an adviser for past assignments, said that even with the departures, Edgeview has maintained the quality of its work.

While Hobbs said he did not have knowledge of any plans by Edgeview employees to buy back their firm, he thought such a sale would benefit the advisory firm.

"Would I like to see them independent again? Absolutely," Hobbs said.

Cain Brothers Appoints New CEO; Focus Remains Health Care

INVESTMENT DEALER'S DIGEST
November 2, 2009

Co-founder, James Cain, remains on executive committee

By Ken Tarbous


Health-care specialty investment bank and capital advisor Cain Brothers said Robert Fraiman Jr. will take the reins as chief executive and president on Jan. 1.

Fraiman, 51, will take over the duties from CEO James Cain, who co-founded the firm 27 years ago. Cain will continue to serve on the firm’s executive committee.

The firm plans to stay focused on health care through specialists who focus on tax-exempt capital markets, corporate finance, and real estate. At the same time, it will grow its asset-management business, which already has attracted clients from the hospital and insurance sectors and other areas related to healthcare, says Fraiman who has 24 years banking experience.

Fraiman joined Cain Brothers as head of its corporate finance group in 2004. He will continue on in that role in addition to his new responsibilities. Before joining Cain Brothers, Fraiman was in charge of healthcare investment banking at BMO Capital Markets.

Fraiman, who has an MBA from Columbia Business School, also spent 16 years at Bear Stearns, where he co-founded the healthcare investment banking group. Fraiman’s father, Robert Fraiman Sr., ran a specialist firm on the floor of the New York Stock Exchange, where he was a trader for more than 30 years before retiring in the mid-1980s.

Firm owners take it in the wallet

INVESTMENT NEWS
September 13, 2009

By KEN TARBOUS


While few independent advisory firms were able to completely avoid salary cuts, the owners of many firms reduced the extent of those cuts by slashing their own paychecks in 2008.

The 2009 Moss Adams/InvestmentNews Adviser Compensation and Staffing Study found that the heads of nearly 70% of the 757 independent advisory firms surveyed cut their own salaries last year — in many instances to a greater degree than they asked their employees to absorb.

“The owners have tried to take most of the pain themselves, particularly the firms that are better-positioned in the long run,” said Matt McGinness, a principal at Best Practices Research, the research and consulting firm that analyzed the survey results. “They have done that [rather than] cutting staff.”

Enlarge This PhotoIn many cases, the owners' pay cuts helped forestall, or even avoid altogether, widespread salary reductions, Mr. McGinness said.

For employees, seeing a firm owner take a bigger pay cut than they had to is something of a morale booster, said Sean Cunniff, research director in the brokerage and wealth management practices at The Tower Group Inc.

“It is tough medicine in the short run, but it can pay for itself many times over in the long term,” he said.

Indeed, “these times will define the character of firms,” said Philip Palaveev, president of Fusion Advisor Network, which provides independent advisory firms with business management consulting, marketing support, advice on best practices and other tools. “There's a lot of research that culture is created [during time of] crisis.”

George Tamer, director of strategic relationships at TD Ameritrade Institutional, whose team has worked with more than 1,800 advisors this year, said that beyond cutting their own compensation, owners of advisory firms are trying to find ways to reduce expenses, such as renegotiating equipment leases and attacking operational inefficiencies, before cutting employee compensation.

Automatic enrollment quadruples over three-year period among retirement plans run by Vanguard

August 26, 2009


By KEN TARBOUS

About 20% of the defined contribution plans administered by The Vanguard Group Inc. had adopted automatic enrollment by the end of last year, up from just 5% three years earlier, according to a recent study by Vanguard.

“How America Saves 2009” also found that employees covered by automatic enrollment plans at the Malvern, Pa-based mutual fund company had an overall participation rate of 84%, compared with 60% for plans with voluntary enrollment.

At the end of 2008, about half of Vanguard’s 2,200 defined contribution plans had designated a qualified default investment alternative and, of those, 85% chose a target date mutual fund.

“This means that more people are being defaulted into [target date funds],” Vanguard spokeswoman Linda S. Wolohan said yesterday.

The survey also found that decreases in participant account balances were not as drastic as might have been expected.

Participants who had balances both at the start and end of the 2008 experienced a median decline of 14%.

The median decline for pre-retirees — those ages 55 to 64 — was 16%.

On average, participants contributed 7% of their salaries to their retirement accounts in 2008, compared with 7.3% in 2007, the survey found.

The drop is due to the 3% deferral rate set by many automatic enrollment plan sponsors, said Vanguard.

The survey, which was released Aug. 19, looked at the behavior of more than 3 million participants.