The Bull Is Back...If You're a Large Company

The bull market might be back in force. But small and medium sized public companies are still having a tough time raising capital. They have become the Cinderellas of the economy -- overlooked -- leaving a market opportunity for enterprising financiers.

The Dow and the Nasdaq are both up more than 18% so far this year. Yet if one digs deeper, what do the small and medium size business owners and executives report? For them the markets remain challenging. Yes, they're seeing an increase in demand for their products and ever bigger order backlogs and opportunities. They need to respond to that demand by raising capital, typically, $5-20 million at a time. The problem is that doing so by traditional routes has become a great challenge.

In short: the potential and attractiveness of small businesses has been overlooked among the market euphoria.

The best example of this is in the so-called PIPE market, long the lifeline for small companies to raise capital quickly, has become increasingly less accessible. The most compelling statistic that underscores the difficulties companies are having in this market is drop in total deal size, down 6.6% versus the same period last year. Small deals are down too. The ever important $10-14.9 million deal category volume has dropped 9%, year-over-year.

Many investors are looking for enhanced liquidity and surety, preferring to invest in blue chip and large cap companies.

Other examples of small businesses being shunned abound. The high yield market has shown little to no interest in small illiquid loans, regardless of interest rate or structure. Commercial banks, albeit flush with cheap money, are hesitant to make loans to all but the surest and secure of balance sheets.

But all is not lost. Hedge funds, private equity and "Business Development Companies" have all jumped in to fill this void. Enter the "mezzanine multi-tranche convertible debt security." It is complex, but the short version is that there is less and less dilution from converted debt as share prices increase.

There are other flexible features as well, but the underlying thesis for these types of capital raising transactions is that through the use of thoughtful and innovative structures, long term institutional capital partnerships can be established for small cap companies.

One size or structure does not fit all but even in these difficult markets, but there is still tremendous opportunity to raise capital even for small and medium sized business.