With banks tightening their commercial lending activities, capital-hungry companies throughout Los Angeles have been left in the cold. And that's bringing hot prospects to private investors who are eagerly providing debt and equity financing on terms very favorable to them.
"Opportunities exist that are better than I've seen in 30 years of being in the business," said Glenn Golenberg, managing director of Golenberg Schmitz Capital Partners LLC, a Los Angeles merchant banking firm.
Golenberg, in the investment banking business since the 1960s, has arranged more than $1 billion in financing. He also has been involved as a financial adviser in many initial public offerings, financial restructurings, venture capital financings and leveraged buyouts.
He is focusing on investments in small- and micro-cap companies, those considered too small for the big investment companies to service. As he puts it: "The bigger the elephant gets, the easier it gets to run between their legs."
Brokerage firms aren't writing research reports on these smaller companies which generally have market caps of less than $250 million and institutional investors won't buy the stocks because of their relatively illiquid nature. Also, investment banks aren't interested in having such companies as clients because they do not generate much fee income.
Golenberg's firm takes up to a 25 percent equity stake in companies that need another dose of capital to reach critical mass. Most are based in Southern California, a region densely packed with small- and micro-cap companies.
William E. Simon & Sons, an L.A.-based private investment firm and merchant bank founded by the late Treasury Secretary, William E. Simon, also has seen the big finance institutions pull out of the small-cap market.
"Given the circumstances in the marketplace, there are some opportunities to purchase companies at prices less than what they were a year ago, but it takes longer and they are more difficult to finance," said Robert MacDonald, president of the firm's private equity group.
Golenberg and partner Clarence Schmitz, a former Jefferies Group Inc. executive, like what they see in the small- and micro-cap marketplace enough to consider setting up a fund for private investors devoted to those small companies.
"There are 6,000 companies that have market caps under $250 million, and all of those are very good companies that need capital," Golenberg said.
Because the companies are small, they've used debt as much as they can. The equity base of the companies is comparatively small, so they need new equity. But in a sagging economy, there are not enough sources of equity for them, which is why Golenberg believes his firm could find success with the new fund.
While Golenberg Schmitz focuses on companies that already are public, other L.A. investors focus on early-stage private companies left out in the cold by banks' tightfistedness.
Steve Kim, managing partner of Alcatel Ventures, is seeing more business plans from technology companies than ever before. "The reality is that private equity is hard to get," Kim said. "So the pricing is more reasonable and valuations of the companies are reduced."
Kim, who built Calabasas-based Xylan Corp. into one of L.A.'s fastest-growing companies before selling it to French communications equipment giant Alcatel for $2 billion, set up the $200 million venture fund early last year with Alcatel.
The Alcatel fund is tiny compared to some of the other, billion-dollar L.A. funds, but unlike some of their principals, Kim is not cowering. "There are a lot of companies out there, and less competition from VCs means more time to work on the companies and do due diligence," he said.
Today, Kim peruses up to 400 business plans per quarter, a mountain he typically must mine to hit upon the two or three worthwhile deals that he funds per quarter.
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