The vanishing IPO market is having an unexpected effect on L.A. venture capitalists they're having to dig deeper in their wallets.

With mature VC-funded companies unable to raise capital in the public markets, local venture capitalists are being forced to double down to keep their investments afloat.

"Exit opportunities are few and far between, and that affects the number of later- stage companies in need of funding," said Randy Churchill, director of business development of the Southern California venture capital practice at PricewaterhouseCoopers LLP.

One bright spot: $36 billion was invested nationally by limited partners in venture capital funds in 2007, the highest amount since the Internet bubble of 2000. "There is still a lot of money coming into the system," he said.

Locally, venture capital funds plowed $250 million into Los Angeles firms in the first quarter, down from $365 million in the first three months of 2007, according to the latest MoneyTree venture capital report by the accounting firm and the National Venture Capital Association.

However, last year's figures were inflated by a single large transaction of $108 million. Indeed, the number of first-round venture investments in L.A. nearly doubled to 16 from nine since the first quarter of 2007.

"Over the last year or two, digital media and alternative energy have crystallized as the two industries in L.A. getting the most focus and money from VCs," Churchill said.

But while venture investment in Los Angeles remains strong the same can't be said for IPOs.

Hollywood special-effects studio Digital Domain Inc. was the latest victim last week when it had trouble pricing an initial public offering that it hoped would raise nearly $80 million.

San Francisco-based investment bank Thomas Weisel Partners, which served as underwriter for the offering, said that pricing of the deal was "day to day."

The only L.A.-based company to launch an IPO in the first quarter was IPC Hospitalist Co. Inc. The hospital physician management company raised $94.5 million in January.

In the first quarter of last year, two L.A. firms went public. Commercial developer Mereulo Maddox Properties Inc. raised $455.5 million, while Santa Monica Media Corp. received $100 million.

Cathay's Counterattack

Faced with what may have been a surge of speculators shorting its stock, Cathay General Bancorp appeared to counterattack by releasing its quarterly earnings early.

The Los Angeles-based Chinese bank saw its stock hit an all-time low of $16 a share on April 17 in advance of a scheduled earnings announcement on April 24 that was expected to be poor.

The bank then turned around and released a report that day that beat analysts' expectations and boosted the share price 17 percent. Analysts suspect Cathay may have deliberately released the earnings report early despite denials from the bank.

"I think they felt pretty good about the results, and because the stock had been under significant pressure, they wanted to dispel any concerns in the market," said Joe Morford, an analyst at RBC Capital Markets.

Cathay's earnings per share of $0.55 beat estimates by 3 cents at a time when other L.A. bank companies, from market leader City National Corp. to East West Bancorp Inc., have reported reduced earnings stemming from the Federal Reserve's decision to rapidly lower interest rates.

In fact, after reporting an 88 percent drop in its earnings, East West on Thursday raised $200 million in a secondary offering of preferred stock to shore up its capital base. East West shares gained 14 percent on the day of the public offering.

In an interview, Cathay Chief Financial Officer Heng Chen downplayed the decision to release the report early. "We were able to complete the earnings faster and we did not want to sit on it," Chen deadpanned.

Driving into Debt

L.A.'s collapsing housing market is now taking its toll on the car in the garage.

The region's residents are more highly leveraged on auto loans and have significantly higher rates of delinquency on car loan payments than the national average, according to credit reporting company TransUnion.

The average auto loan balance in the Los Angeles metropolitan area was $15,339 in the fourth quarter of last year, more than 20 percent higher than the national average of $12,738.

The delinquency rate was even worse: 40 percent higher than in the rest of the nation. And the percentage of L.A. auto loan borrowers more than 60 days late on payments was 1.34 percent, compared to only 0.79 percent nationwide.

Highly leveraged home owners with rising adjustable rate mortgages are finding it increasingly difficult to stay current on car loan payments, said Ezra Becker, a consultant at TransUnion's financial services group.

"People who have mortgages also tend to have auto loans and credit cards, and if more income goes to pay the mortgage, less is available for other debt service burdens," he said.

Staff reporter Mitch Deacon can be reached at mdeacon@labusinessjournal.com or at (323) 549-5225, ex 225.

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