WALL STREET WEST — Firm Eyes Market for Loans To Cash-Poor Web Startups


Go to where short-term financing needs meet the Internet, and you’ll find Beverly Hills-based Imperial Capital Group LLC setting up its tent. It just announced a $10 million cache appropriately named Venture Bridge L.P.

“We are financing companies that are beyond the angel stage of financing, and are waiting for that second-stage of venture money,” said Jason Reese, co-president of Imperial Capital. “We help them take care of their burn rate.”

That means supplying short-term debt financing (bridge loans) to tide Web outfits over meet payroll, buy advertising, etc. until new investment capital pours in.

Imperial Capital charges 12 percent annual interest for its loans, which run in the $100,000 to $500,000 range, said Reese. In addition, Imperial Capital takes warrants on private stock, at a 15 percent discount to equity investors in future rounds of financing.

Imperial Capital wants warrants on an amount of stock up to 100 percent of the loan value. So, for example, on a $100,000 loan, Imperial Capital would seek a warrant to purchase $100,000 of the borrower’s stock at a 15 percent discount giving the warrant an immediate value of $15,000. The further expectation, of course, would be that the warrant’s value greatly appreciates over time, as the borrower’s company grows.

So who’s investing in this new bridge-loan fund?

“We have a lot of high-net-worth investors,” explained Reese. “The Venture Bridge fund provides them with a way to invest in Internet companies, limit their downside risk, but still accumulate warrants in a diversified pool of companies.”

Four loans have been issued so far, and two are close to closing, said Reese. He expects to make about 40 loans from Venture Bridge L.P., mostly to Southern California companies. If the concept works, Imperial Capital plans to start a second fund. Meanwhile, the first fund will continue operating indefinitely by “rolling over” its proceeds into new loans.

Meanwhile, Reese says the M & A; market is heating up for good quality small-cap companies with low price-earnings ratios. “Some companies are trading in public markets for less than they are worth in the private market,” said Reese.

As widely noted, good quality but mature small-cap companies are pretty much a dud on Wall Street today, and have been for years. If a small cap doesn’t have a growth story to tell, the mutual funds can’t be bothered, and without underwriting opportunities, the brokerages won’t provide analyst coverage.

So Reese and the other 84 employees of Imperial Capital are finding work advising small caps on going private, or merging with larger companies, or selling off divisions.

Though junk-bond financing currently is not available for large leveraged buyouts, smaller management buyouts (under $150 million) can be financed by loans from banks, insurance companies and mezzanine funds, said Reese.

For the small-cap companies that wish to stay public, “maybe they should have ongoing stock-buyback programs,” Reese advised, which would increase posted earnings per share, and thus hike share values somewhat.

Steady return

These days, most money managers talk about “beating the market,” or “minimizing risk.” But from his vantage point on Indian Hill in Claremont, investment adviser Don Gould has a different outlook: He wants to aim an arrow at real, inflation-adjusted returns of 7 percent a year.

To achieve his goal Gould, who founded Gould Asset Management LLC in 1999 after working for money giant Franklin Templeton for six years, first makes estimates on the expected returns of 20 different asset classes, including domestic and foreign stocks and bonds, high-yield instruments, REITs and other categories, on a monthly basis.

Then he makes an allocation among the 20 categories, to hit the 7 percent real target (currently about 10 percent, after inflation), while minimizing risk.

As a private adviser, Gould does not reveal his exact portfolio, but last week allowed that its about 30 percent in equities currently, and the rest in bonds. He does not buy individual stocks and bonds, but rather indexes or funds, and he does not leverage or short the market, he said.

Though tight-lipped, Gould did say his portfolio has little or no exposure to the Far East, high-yield bonds, and perhaps surprisingly, nothing in the fat dividend-paying REIT sector.

The strategy “has worked since 1994,” in hitting the targets, says Gould, a Pomona College grad and Harvard MBA holder.

He has back-tested the data to the 1920s though it should be noted that investment schemes of all sorts are routinely shredded by the market, and Gould’s best-laid plans could suffer the same fate.

Why even settle for 7 percent real return? Gould answers that Wall Street is not always a winner. From 1968 to 1982, it was not, and historically many five-year periods are not. “If you want part of your portfolio to be reliable,” said Gould, “you might want to invest with me.”

But bring along $250,000; that’s Gould’s minimum account size.

Aussie Invasion

Even the Australians have landed in Los Angeles, looking for Internet infrastructure companies to finance but with a twist, said Alan Munday, chief operating officer with the Melbourne-based Seneta Corp. Ltd.: If the Web technology proves out, “we want to be the soft gateway” for the Web business back into the Australian and Far East markets.

“The Far East is a couple of years behind the U.S.” in its adaptation of all things Web, said Munday.

If Munday is right, people in the Far East, and even sooner in the United States, better get used to holding their right index finger up to a panel before conducting sensitive Web transactions. The day of “remote biometric authentication” is rapidly approaching, and Seneta (itself publicly traded on the island continent) has taken a majority stake in Irvine-based eCryp Inc., said Munday. The outfit makes software that authenticates fingerprints online, while protecting the data from snoopers. Munday said hardware devices made by other firms to read fingerprints now cost “20 bucks wholesale.”

Already, some portable computers have little panels that slide out, for the reading of fingerprints.

The first users of the fingerprint technology will likely be “B2B” users, said Munday. Two likely users are companies that place orders with each other and want to make sure the deal is real, and also offsite employees logging into sensitive company files. But ordinary consumers and their credit cards are just around the corner, said Munday.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].

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