By Brett Goetschius
Investors in emerging growth companies will need to stay nimble to succeed in 2015, as increased market volatility in high-growth microcaps focuses their attention on trading and risk mitigation. That is the collective wisdom of microcap fund managers and growth equity private placement advisers who expect to attend the Growth Capital Expo 2015 on April 12-14 at Caesars Palace in Las Vegas – the second year of this conclave of thought leaders and active investors in the pre-IPO and emerging growth microcap market.
For much of 2014, growth equity private placement (EPP) activity had settled into a promising deal-making groove that was on pace to best 2013. But a spike in volatility in the fourth quarter slowed deal making and ushered in a ho-hum year-end performance.
Still, investors doled out more capital to companies than in 2013 as the economy showed signs of broader improvement through consistent job creation and robust second and third quarter GDP growth of 4.6% and 5%, respectively.
Whether continuing signs of improvement are enough to convince growth capital investors to increase activity in 2015 could hinge on how confident they are that the economy has actually turned a corner, especially with uncertainty around oil’s plummet, lackluster retail sales in December and the lowest employment participation rate since 1978.
It also could depend on how long market volatility hangs around to distract them, said John Borer, senior managing editor and head of investment banking for placement agent the Benchmark Company, which facilitated five EPPs to secure $58.7 million in 2014.
“From January to December, we may see what looks like a normal or even good year from an overall market perspective,” he said. “But if the market’s up 300 points one day, down 300 the next and then up 150 the next day, it gets an awful lot of people focusing on making money by trading the volatility as opposed to investing in companies.”
Emerging growth equity investment trends will the subject of two discussion panels featuring top industry bankers and investors on the first full day, April 13, of the Growth Capital Expo. The panels will explore trends in both registered and unregistered equity private placements. (For a complete agenda of the Expo program, go to http://growthcapitalexpo.com/agenda.)
As a whole, growth EPP activity and dollar volume didn’t deteriorate materially in 2014 compared with 2013, and growth companies last year wound up pocketing more proceeds. (Growth EPPs are registered and unregistered private placements of a least $1 million of stock or equity-linked debt that feature fixed purchase, conversion and warrant exercise price terms, and that are sold by companies that have market capitalizations from $10 million to $1 billion.)
Issuers in 2014 conducted 723 growth EPPs that raised $13.2 billion for an average deal size of more than $18 million, according to PlacementTracker, a division of Sagient Research. In 2013, growth companies completed 733 transactions to raise $12.6 billion for an average transaction size of $17.2 million.
However, deal making began to tail off in early October as the broad market became volatile. Up until then, issuers and investors had closed an average of 163 deals per quarter. But they only completed 127 transactions in the quarter, valued at nearly $3.5 billion. Still, that worked out to a generous $27.4 million average per deal.
Growth companies also continued increasing their uptake of at-the-market programs in 2014, entering into 69 ATM agreements with a potential to raise $3.3 billion for an average of $48.7 million per deal. Not only is that the most agreements executed in a single year in the EPP market, but it also is the largest dollar volume commitment ever. Companies have tapped 26 of the programs so far this year and have raised $359 million, or an average of $13.8 million per ATM.
In 2013, companies agreed to 65 ATM programs, committing to raise as much as $2.7 billion, or $41 million per transaction. Issuers have utilized 48 of the arrangements, selling $726.7 million worth of shares for average gross proceeds of $15 million per deal.
Investors in the healthcare sector were far and away the busiest of any in 2014, and biotech companies were in particular demand, a theme that also played out in the IPO market. According to the life science-focused Burrill Report, 106 biotech IPOs in the U.S. raised nearly $9.3 billion in 2014, and the companies closed the year up 29.6%.
In the EPP market, biotech companies completed 122 transactions in 2014 to raise $2.8 billion for an average raise of $23.2 million. That was up from 105 deals last year valued at $1.9 billion for an average raise of $18.5 million.
Edwin Gordon, a managing director with investment bank Ladenburg Thalmann & Co., credits the improved science underlying biotech clinical trials for the dizzying investment activity in the maturing industry.
“It was a remarkably active year for both IPOs and private deals,” said Gordon, whose firm facilitated 10 EPPs to secure $353.6 million in 2014. “Investments that were made in 2000 are now paying dividends, so the market has broadened to include not just venture funds but a significant number of crossover investors.
While volatility in the markets is a concern, Gordon anticipates that the industry will enjoy another solid year of capital formation in 2015. “There’s been about $200 billion in cash paid out in the form of share repurchases or M&A in life sciences in 2014,” he said. “Where’s that money going to go?”
Companies in the healthcare products industry were also among the most active issuers, completing 63 EPPs to raise $577.6 million for an average of $9.2 million per deal. Medical laser maker Biolase (BIOL) closed one of the year’s biggest deals in the industry in November when it raised $33.8 million for working capital in an unregistered common stock EPP priced at market ($2.39 a share). The deal that included 9.2 million three-year warrants exercisable at $4 a share, or a 67% premium.
Camber Capital Management, Oracle Investment Management, Eagle Growth Partners, Birchview Capital and Trellus Partners participated in the transaction. Biolase’s shares were recently trading around $2.55.
Pharmaceutical firms wrapped up the healthcare sector’s stout fundraising effort for the year, securing $852.5 million in 41 transactions for an average deal size of $20.7 million.
Other sectors displaying notable activity in 2014 include the various industrial industries, such as aerospace, electronics, environmental controls and transportation. All told, issuers in the industrial sector completed 71 EPPs to raise $2 billion. But transportation companies attracted the bulk of the capital – nearly $1.6 billion – in 17 transactions.
Companies in the technology and communications sectors combined executed 84 EPPs during the year to raise $1.2 billion. Issuers focused on telecommunications and Internet applications and services raised about half of that amount in 38 of the deals.
Energy sector companies, meanwhile, gathered nearly $1.7 billion in capital in 57 transactions for an average deal size of $29 million. Firms tied to fossil fuels accounted for $1 billion of the dollar volume in 30 transactions, while alternative energy issuers made up the balance.
Notably, however, only two companies in the oil and gas sector completed deals in the final four months of the year amid the oil price slide, which began slowly in August and accelerated in October. And both of the companies – Pedevco Corp. (PED) and CHC Group (HELI) – were in the services business rather than explorers and producers.
Moving forward, Borer anticipates a reasonable amount of follow-on activity in 2015, ranging from unregistered common stock EPPs to fully underwritten and marketed offerings.
“The tech area seems to be rather enthusiastically embraced these days, and life sciences and biotech companies always need money,” Borer said. He also expects the IPO market to remain robust. “There are certainly a lot of companies that want to come out,” he added.
The Growth Capital Expo 2015 will again feature the very popular pre-conference Public Company Boot Camp on April 12, from 2:00-6:00 pm. This workshop is designed for officers and directors of pre-IPO and recently public growth companies seeking to improve their knowledge and execution of their public markets activities. This year the boot camp program will be sponsored by the National Association of Corporate Directors, the premier organization supporting board development and good corporate governance.
Growth companies already trading on public markets that conducted EPPs pursued unregistered common stock deals more frequently than any other structure in 2014, issuing 232 deals to raise $3.2 billion for an average deal size of $13.9 million. Investors in the transactions received an average discount of 10.9%, and 104 of the EPPs included warrants with average coverage of 75% and an average exercise premium of 21%.
Roth Capital Partners led all placement agents in arranging growth EPPs last year, facilitating 43 deals to secure $919 million. H.C. Wainwright & Co. secured $848 million in 40 transactions, and Cowen and Company secured $774.8 million in 27 EPPs.
Based on activity in which dollar volume was disclosed, Sabby Management led all investors, taking part in 42 deals and ponying up a total $82.3 million. Broadfin Capital participated in 22 deals and invested $18.4 million, and Heights Capital Management invested $24.3 million in 21 transactions.
For more information about the Growth Capital Investor, go to: www.GrowthCapitalInvestor.com
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