Why CFOs should stop mistrusting hedge funds
Mark Angelo was working as co-head of corporate finance for boutique investment bank May Davis Group when he recognized a potential market niche. As the small and mid-size investment banks experienced a wave of consolidation or were snapped up by larger players, equity financing for companies with a market capitalization of less than $250 million was drying up. Investors also faced a problem. By 2000 the small cap market was suffering from a severe liquidity drain.
Angelo’s solution to protect the downside of liquidity providers, and enable companies to acquire capital cheaply was the Seda – a standby equity distribution agreement. Since establishing Cornell Capital Partners in 2000, the company has committed in excess of $1.5 billion in capital to more than 250 companies, with a compounded annual return to investors of 30.1%.
The financing structure is indeed unique. Cornell typically agrees to buy up to $20 million of a small-cap company’s shares over a two-year period in maximum chunks of $1 million. As Cornell is legally bound to buy the shares, the company management does not have to waste time and money on roadshows and investor presentations. For example, Company A advises Cornell that it is ready to issue 1 million shares at a dollar a share into the secondary market. After five trading days, Cornell buys all the shares at their lowest cost over the trading period at a maximum 5% discount. Company A then has $1million in capital to spend on balance sheet improvements, acquisitions, new hires and so on. If the company’s share price increases, Company A can take advantage of the environment and raise more capital through Cornell with fewer shares, resulting in less dilution. But for Cornell, how the company performs after the issue is relevant only in the fact that if the company benefits it will continue to use the facility.
It is a similar structure to a Pipe (private investment in public equity) but Angelo is keen to point out the differences. Pipes are highly illiquid and considered high risk by many investors. What’s more, issuers to Pipes often have to sell their stock at a discount of between 7% and 35%, and are not offered staggered secondary offerings. Cornell’s structure works with a smaller discount and offers more liquidity.
