Current markets a nirvana for PIPE investors, says Yorkville president

By Kenneth Lim

Boston, Jan. 6 - PIPE investors are likely to see a good year in 2009 as the markets present some of the most attractive opportunities ever, said Yorkville Advisors, LLC president and founder Mark A. Angelo.

"If you're an investor in private placements, innovative solutions, this is your nirvana," Angelo said. "This is what you've been looking for."

PIPEs move to mainstream

More companies are seeing PIPEs as an acceptable fund-raising avenue as seeking capital through more public alternatives proves difficult, Angelo said.

"Even if it was not a difficult lending environment, I think people now truly see the value of a private placement," he said. "You can negotiate things privately and get flexibility that you can't get in a traditional public offering. I would say the market has truly come our way."

General Electric Co.'s $3 billion preferred placement and Goldman Sachs Group, Inc.'s $5 billion preferred placement, both to billionaire investor Warren Buffett's Berkshire Hathaway Inc., were examples of large companies that chose to use PIPEs. Angelo pointed out that those companies essentially gave Buffett hefty coupons and liquidation preference in exchange for capital.

Less attraction in smaller names

The trend has been good for buysiders like Jersey City-based Yorkville, which has more opportunities to invest in big companies at more favorable terms, Angelo said.

"It should be a strategy that hedge funds will look at in 2009," he said.

The flip side is that for small issuers, attracting capital is now more difficult than ever, Angelo added.

"When you have companies like Goldman Sachs or GE doing PIPEs, if the smaller companies want to attract capital, they have to offer terms that are more attractive than that," he said.

"It's unfortunate, but if you're a smaller name in this environment, it's very difficult for you to attract capital, because it's hard for you to offer a company like us something that we can't get in a company that's 20 times bigger," he added.

Issuers to seek higher prices

Issuers in the current environment are likely to be interested in structures that allow them to sell stakes at prices higher than today's market valuations, Angelo said.

"I think you have a lot of issuers who feel that their equity are trading at prices that don't reflect the value of their company," he said. "You might see structures where companies may be willing to pay for a higher fixed price. Maybe a higher coupon for a higher fixed price."

Equity financing facilities, in which investors usually commit to buying stock at the option of the issuer in the future, could be popular for that reason, Angelo reckoned.

"They've been extremely successful," he said.

Uncertainties persist

Angelo acknowledged that despite all the opportunities now available, there are still many uncertainties in the market.

Investors, for example, must still find capital to be able to take advantage of any opportunities.

"I think there's a lot of investment opportunities that are in front of us and just about any lender or purchaser," he said. "And the question is how much capital can you have to meet those opportunities? I don't have any answers there. When the Dow Jones goes from 15,000 to 9,000, does anybody have any money to buy at 9,000?"

But he noted a slight improvement in sentiment.

"I do think that more people believe that a bottom has been established," Angelo said. "Seems to be a little less pessimism."

The timing of a recovery continues to be a tricky call to make.

"I don't think there's really a short-term solution, and I don't know if it's a three- or six- or 12-, 15-month phenomenon," he said.

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