By LARRY KANTER
The topsy-turvy stock market is putting a damper on Los Angeles-area initial public offerings.
With Wall Street in a state of rapid retreat the Dow Jones industrial average has plunged more than 500 points in recent weeks L.A. firms seeking capital to expand will have to find it in places other than the public markets, local investment experts said last week.
“Los Angeles is, to a large degree, a community of small cap companies” that is, firms with revenues of less than about $300 million, said Jonathan Merriman, director of equities for Dabney/Resnick/Imperial in Beverly Hills.
And when the markets turn volatile, “small cap IPOs are going to be much tougher to do,” he said.
That’s because in times of uncertainty, investors increasingly look toward the blue chip companies that have demonstrated strength and stability over the long haul rather than the small, sexy start-ups that have garnered so much investor attention in recent years.
As a result, L.A. high-growth firms that might have held public stock offerings a year or two ago when the IPO market was sizzling instead will be seeking capital from private sources, said John Morris, managing director of the technology group at Beverly Hills-based Sutro & Co. Inc.
“There is a private capital marketplace that has been watching the public capital markets take away their business,” Morris said. “A lot of the private equity has been waiting for a downturn in the market.”
Sources of private capital poised for an uptick of business include insurance companies, pension funds, private equity funds and money management funds.
What does that mean for L.A. high-tech, multimedia and health care businesses in search of investment capital? Investment experts say the money is still available, but firms may have to settle for less than they might have been able to raise through IPOs.
Merriman said Dabney/Resnick/Imperial has been stucturing smaller deals, where a company will receive a private placement of between $5 million and $10 million to get through a high-growth period and buy time until the market becomes more IPO-friendly.
“Small companies with good fundamentals will still be able to raise money,” added Peter H. Griffith, managing director of Wedbush Morgan Securities.
In fact, a downturn in the once-hot small cap marketplace is nothing new to investment bankers; small cap stocks have been exhibiting signs of stress since last fall, long before the Dow began its retreat, according to Griffith.
“The buyers have been leery of small cap companies,” Griffith said. “Investors haven’t been interested in (companies) under $100 million. What we’re seeing is a reversion to more stable business.”
Indeed, Griffith already is waxing wistful about the once-hot IPO market.
“We had an ebullient IPO market from ’94 to ’96,” he said. “That’s a pretty nice run. If we see a year or two of more static activity, that’s probably okay in the long range scheme of things.”