PIPEs surge on muted liquidity concerns Unregistered deals return

Transcription

1 Q Special REPORT News, Information and Analysis of Small Cap Equity Finance PIPEs surge on muted liquidity concerns Unregistered deals return by dan lonkevich Small-cap and microcap companies returned to the private-investmentin-public-equity market in the third quarter, as investors appeared to shrug off concerns about liquidity that plagued the market in recent years. The improvement in the PIPE market came despite declines in smallcap stocks in general. The Russell 2000 Index of small cap stocks declined 8.65% during the quarter. Overall, companies executed 275 PIPE transactions, raising $11.4 billion, according to PrivateRaise, The Deal s data service that tracks the PIPE market. That compares to 267 PIPEs that raised $10.2 billion in the year-earlier quarter. The figures exclude private placements that raised less than $1 million and those by foreign companies that only trade over the counter in the U.S. It was the most PIPEs in a third quarter since 2009 when there were 303 worth $8.56 billion. Unregistered PIPEs, which are most sensitive to liquidity concerns, showed the biggest improvement, with 201 deals worth $6.92 billion. That compares with 174 deals worth $3.04 billion in the same period of It was the most unregistered PIPEs in a third quarter since 2009 when 210 deals raised $6.18 billion. Fund managers are telling us they still hate the illiquid stuff, but there is an appetite for unregistered PIPEs, said Kerry Propper, CEO of investment bank Chardan Capital Markets LLC. What you re giving up in liquidity, you re gaining enough in value to make up for it. Chardan helped arrange five PIPEs during the quarter, worth a total of $78.8 million, according to PrivateRaise. Those include a $10 million investment by Crede Capital Group LLC in biotech company 22nd Century Group Inc. (XXII) last month and Empery Asset Management LP s $4 million investment in energy technology company Ener-Core Inc. (ENCR). The increase in unregistered deals has come despite the perception of weakness in the small-cap and microcap market, Propper said. The Russell is down on the year and microcaps have performed badly, he said. I m not sure we re seeing a risk-on change in attitude, but there s kind of a speculative fever. Some of our unregistered deals have performed really well and that invites more investment, he said. Eleazer Klein, a partner with the law firm of Schulte Roth & Zabel LLP, said that he too has noticed a change in investor attitudes about liquidity. Investors have more comfort in doing an illiquid deal with a company they like, he said. There was a much greater reluctance to do such deals in the past, especially in the years after the financial crisis. Pre-crash there was little concern about liquidity because the terms were always generous enough to offset the risk, he said. I don t know if we re back there yet. Investors are saying they like the economy and if they like the company they re willing to take on more liquidity risk in the right circumstance. Schulte Roth advised investors on 18 PIPEs worth $488.6 million during the quarter, including private placements of stock and convertible debt by oil tanker operator DHT Holdings Inc. (DHT) that raised a total of $300 million last month. I don t think the liquidity concerns about PIPEs have gone away but maybe they ve become a little muted, especially for a compelling story or the right economics, said Jack Hogoboom, a partner at the law firm of Lowenstein Sandler LLP in Roseland, N.J., in an . Lowenstein Sandler advised either the issuer, the investor or the placement agent on eight PIPEs worth $196.7 million in the quarter, including a private placement of $92 million in stock by Diana Containerships Inc. (DCIX) in July and a $35.7 million PIPE by RestorGenex Corp. (RESX). Small cap companies continue to be hamstrung by Securities and Exchange Commission rules that make it harder for them to raise capital in the public markets, Hogoboom said. Those include the so-called baby shelf rules that limit the amounts that smaller companies can raise under shelf registration statements, and the well-known seasoned issuer rules which allow larger companies to issue securities without going through the regular registration process. Unless those rules change, some of those companies will have no choice but to use the PIPE structure, Hogoboom said. The PIPE market is seeing more structured deals as investors are looking for closer to a guaranteed return than they can get in registered offerings, said Joseph Smith, a partner with the law firm of Ellenoff Grossman & Schole LLP in New York. The firm advised either the placement agent, issuer or investor on 20 deals worth $169.7 million in the quarter, including a $40 million private placement of convertible preferred stock by the special purpose acquisition company Hennessy Capital Acquisition Corp. (HCAC) last month and Sabby Management LLC s $20 million investment in StemCells Inc. (STEM) in July. At least one observer speculated that Alibaba Group Holding Ltd. (BABA) s $22 billion initial public offering may have helped boost the PIPE market. Supposedly it takes an oil tanker 10 miles to break before it pulls into CONTINUED >

2 2 Q Special REPORT < Previous port; it is that big and disruptive, said Mitchell Littman, founding partner of the law firm Littman Krooks LLP, in an . So when an enormous deal like Alibaba hit, it got so much attention (among other things the enormous press on how rich the early investors would become), that it reiterated to the market that betting on the right start up could reap big rewards. So seeing an uptick in private placements like that does not surprise me. The number of registered private placements, including confidentially marketed public offerings, declined during the quarter to 74 deals worth $4.51 billion from 93 deals worth $7.15 billion a year earlier. The recent period saw the fewest number of registered deals in a third quarter since 2011 when 64 registered PIPEs raised $3.25 billion. Only 16 CMPOs worth $422.5 million were announced in the recent period, compared with 26 worth $1.05 billion, a year earlier. The number of at-the-market offering facilities also fell to 30 deals worth up to $3.69 billion from 37 worth $5.68 billion, a year earlier. The number of equity-line PIPEs increased to 22 worth as much as $246.2 million from 16 worth $518.1 million, a year ago. The decrease in registered direct offerings and CMPOs probably has to do with how accommodative the market has become to follow-on public offerings, said Charles Mather, co-head of equity capital markets at Janney Montgomery Scott LLC. The investment bank helped arrange a $100 million ATM facility for asset management firm Medley Capital Corp. (MCC) in August and an $11.5 million CMPO for social network operator MeetMe Inc. (MEET). People have been more willing to do traditional follow on offerings, Mather said. The risks associated with being out public is less because the market is more accommodative. The idea behind CMPOs was that you could build a book quietly and not have to face a large discount, he said. The perceived difference between the discounts in CMPOs and follow-ons has lessened. The biggest PIPE of the quarter was Coca-Cola Co. (KO) s $2.15 billion strategic investment in Monster Beverage Corp. (MNST) in August. Other mega-pipes included helicopter service provider CHC Group Ltd. (HELI) s $500 million private placement of convertible preferred stock with private equity firm Clayton Dubilier & Rice Inc. in August, and online travel service Priceline Group Inc. (PCLN) s $500 million strategic investment in convertible debt from Chinese online travel service Ctrip International Ltd. (CTRP). Some at-the-market offering facilities were arranged for potentially larger dollar amounts, although ATM facilities are rarely fully taken down. The largest ATMs will allow Plains All American Pipeline LP (PAA) to issue up to $900 million in stock and DCP Midstream Partners LP (DPM) to raise up to $500 million. Healthcare companies were once again the most active issuers of PIPEs, with 70 deals worth a total of $1.23 billion. The biggest healthcare deal was a $125.6 million private placement of convertible debt by Molina Healthcare Inc. (MOH) last month. The Long Beach, Calif.-based company provides services to help states manage Medicaid programs. The energy industry was the second-most active in the PIPE market, with 43 deals worth $2.65 billion. Technology companies were close behind with 40 deals worth $942.5 million. It will be interesting to see how the fourth quarter pans out, given the recent increase in volatility, Janney s Mather said. He attributed the increased volatility to investors concerns about the slowing economy in Europe, geopolitical problems in the Mideast and Ukraine and even the first U.S. case of the Ebola virus in Texas. Assuming the increased volatility is transitory, the fourth quarter should continue the trends we ve seen over the past year with continued interest in new issuance, he said. If volatility proves longer lasting, he said investors may become risk averse and less inclined to invest in illiquid companies without significantly larger discounts. All of our bankers insist they have a ton of deals coming in the fourth quarter, said Ellenoff Grossman s Smith. They always say that and sometimes it s true, but they swear we re going to be swamped. H.C. Wainwright & Co. Inc. was the most active PIPE placement agent during the third quarter. The New York-based firm, which is led by former Rodman & Renshaw LLC vice chairman Michael Vasinkevich, helped arrange nine deals worth $114.3 million. Those included a $62.3 million private placement of stock by La Jolla Pharmaceutical Co. (LJPC) in July. Cowen & Co. LLC was the next-most active, arranging seven deals worth a total of $147.9 million. It also arrange a $35 million ATM facility last month for biotech company Alimera Sciences Inc. (ALIM). Maxim Group LLC also arranged seven PIPEs in the quarter, for a total of $86.5 million. It also was one of the banks that underwrote Medley Capital s ATM. Sabby Management, the investment manager run by Hal Mintz, led all PIPE investors, with eight deals worth $29.45 million. The Upper Saddle River, N.J.-based firm invested more than $16 million in private placements of convertible preferred stock and convertible debt from MELA Sciences Inc. (MELA) in July. Downsview Capital Inc., the Northbrook, Ill.-based firm run by Mitchell Kopin, was the next-most active PIPE investor, putting a total of $3.9 million into seven PIPEs. Its largest deal in the quarter was a $2.11 million investment in BSD Medical Corp. (BSDM) in July. Chicago-based Equitec Group LLC made six PIPE investments, totaling $880,000. Those included a $500,000 investment in BSD Medical s private placement of stock. n

3 3 Q Special REPORT PIPE LEAGUE TABLES PIPEs Issuance by Security Type Security Type # Total $ Avg. $ Common Stock 156 $4,784,142,147 $30,667,578 Pref: Conv 23 $1,037,746,471 $45,119,412 Pref: non-conv 2 $70,000,000 $35,000,000 Debt: Conv 33 $1,087,227,650 $32,946,292 Debt: non-conv 6 $85,790,000 $14,298,333 Other: Conv Prepaid Warrant 4 $486,907,859 $23,186,089 Equity Line 21 $196,150,000 $6,763,793 At-the-Market Offering - $3,686,400,000 - Unknown Totals 245 $11,434,364,127 $42,349,497 Total Placements (Issuer Market Capitalization & Security Type) PIPEs Issuer Market Capitalization Issuer Market Cap # Total $ Avg. $ Less than $50 M 123 $887,173,905 $7,212,796 $50 M - $99 M 55 $683,757,597 $12,431,956 $100 M - $249 M 31 $641,086,826 $20,680,220 $250 M - $499 M 24 $1,145,784,212 $47,741,009 $500 M - $999 M 18 $1,418,710,198 $78,817,233 $1 B - $4.9 B 16 $2,949,856,456 $196,657,097 Greater than $5 B 4 $3,696,006,192 $924,001,548 Totals 271 $11,422,375,386 $42,305,094 Security Type Less $50 M $50 M - $99 M $100 M - $249 M $250 M - $499 M $500 M - $999 M $1 B - $4.9 B Greater $5 B Common Stock Pref: Conv Pref: non-conv Debt: Conv Debt: non-conv Other: Conv Prepaid Warrant Equity Line At-the-Market Offering Unknown Total Dollars Raised/Secured (Issuer Market Capitalization & Security Type) Security Type Less $50 M $50 M - $99 M $100 M - $249 M $250 M - $499 M $500 M - $999 M $1 B - $4.9 B Greater $5 B Common Stock $532 $505 $223 $601 $359 $402 $2,150 Pref: Conv $83 $2 $81 - $500 $372 - Pref: non-conv $ $ Debt: Conv $59 $43 $5 $170 $185 $626 - Debt: non-conv $52 $2 $1 $ Other: Conv Prepaid Warrant $5 $5 $ $471 Equity Line $127 $39 $ At-the-Market Offering $8 $88 $295 $345 $325 $1,550 $1,075 Unknown PIPE Activity - by Price Type Fixed-Price Reset-Price Variable-Price Security Type # Total $M Avg. $M # Total $M Avg. $M # Total $M Avg. $M Common Stock 152 $4, $ $16.48 $ Preferred Stock: Convertible 21 $ $ $ $ Debt: Convertible 29 $1, $ $14.00 $ $7.71 $3.85 Other: Convertible Prepaid Warrant 4 $ $ Equity Line $ $9.34 At-the-Market Offering $3, $ Totals 206 $6, $ $ $ $3, $74.81

4 4 Q Special REPORT Investment Managers RANKED BY TOTAL DOLLARS INVESTED Rank Investment Manager Total $M Avg. $M # 1 Clayton, Dubilier & Rice Inc. $ $ Caisse de depot et placement du Quebec PSP Investments Government of Singapore Investment Co. Pte. Ltd Deerfield Management Co. LP Ontario Teachers Pension Plan Board Asgard Investment Corp HealthCare Royalty Partners Rhone Group LLC Altai Capital Management LP Martin Resource Management Corp Salient Partners LP West Capital Management Tennenbaum & Co. LLC Sabby Management LLC * 4.91 * 8 16 Euro China Capital AB Wellington Management Co. LLC Oppenheimer Funds Inc Home Value Holding Co. Ltd EverStream Energy Capital Management Mansour Group Monomoy Capital Partners Neuberger Berman Group LLC Crede Capital Group LLC Robust Elite Ltd *EXCLUDES transactions where Investment Amount has not yet been disclosed Placement Agents RANKED BY TOTAL DOLLARS RAISED Rank Placement Agent Total $M Avg. $M # 1 Morgan Stanley & Co. $1, $ RS Platou Markets AS Fearnley Securities AS Cowen and Co. LLC Wells Fargo Securities LLC H.C. Wainwright & Co Jefferies Group LLC Noble Financial Group BMO Financial Group Scotiabank RBC Capital Markets Maxim Group LLC Roth Capital Partners LLC FT Global Capital Inc Chardan Capital Markets LLC Houlihan Lokey Stifel Sandler O Neill & Partners LP LifeSci Advisors Raymond James & Associates Inc Canaccord Genuity Group Inc Craig-Hallum Capital Group LLC William Blair & Co. LLC Barclays Capital Inc Moelis & Co RANKED BY # OF INVESTMENTS Rank Investment Manager Total $M Avg. $M # 1 Sabby Management LLC $29.45 * $4.91 * 8 2 Downsview Capital Inc Equitec Group LLC 0.88 * 0.18 * 6 4 Empery Asset Management LP 5.32 * 1.33 * 5 5 Hudson Bay Capital Management LP 7.30 * 2.43 * 4 6 Wellington Management Co. LLC Crede Capital Group LLC Great Point Partners LLC Diker Management LLC LH Financial Services Corp Lincoln Park Capital Brio Capital LP PSP Investments Government of Singapore Investment Co. Pte. Ltd Ontario Teachers Pension Plan Board Strong Textile Hong Kong Ltd Sandler O Neill Asset Management LLC Pegasus Capital Advisors LP Broadfin Capital. LLC Oracle Investment Management Inc EJF Capital LLC Precept Fund Management Kopple Financial Inc Milfam LLC Birchview Capital LP *EXCLUDES transactions where Investment Amount has not yet been disclosed RANKED BY # OF PLACEMENTS Rank Placement Agent Total $M Avg. $M # 1 H.C. Wainwright & Co. $ $ Cowen and Co. LLC Maxim Group LLC Roth Capital Partners LLC Chardan Capital Markets LLC Stifel Canaccord Genuity Group Inc Northland Securities Inc Morgan Stanley & Co. 1, Merriman Capital Inc RS Platou Markets AS Jefferies Group LLC Noble Financial Group BMO Financial Group Scotiabank FT Global Capital Inc Raymond James & Associates Inc Craig-Hallum Capital Group LLC William Blair & Co. LLC Dawson James Securities JMP Group Inc B. Riley & Co EDI Financial Inc Middlebury Group LLC Palladium Capital Advisors LLC

5 5 Q Special REPORT Investor Legal Counsel RANKED BY TOTAL DOLLARS ADVISED Rank Investor Legal Counsel Total $M Avg. $M # 1 Skadden, Arps, Slate, Meagher & Flom LLP $2, $2, O Melveny & Myers LLP Torys LLP Weil, Gotshal & Manges LLP Debevoise & Plimpton LLP Sullivan & Cromwell LLP Schulte Roth & Zabel LLP Greenberg Traurig LLC Lowenstein Sandler LLP Baker Botts LLP Paul, Weiss, Rifkind, Wharton & Garrison LLP Gibson, Dunn & Crutcher LLP Goodwin Procter LLP Cahill Gordon & Reindel LLP Proskauer Rose LLP Wachtell, Lipton, Rosen & Katz Pepper Hamilton LLP Polsinelli PC WilmerHale Manatt, Phelps, & Phillips LLC Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC Latham & Watkins LLP Winston & Strawn LLP Brown Rudnick LLP Wilson Sonsini Goodrich & Rosati PC RANKED BY # OF PLACEMENTS ADVISED Rank Investor Legal Counsel Total $M Avg. $M # 1 Schulte Roth & Zabel LLP $ $ Greenberg Traurig LLC Paul, Weiss, Rifkind, Wharton & Garrison LLP Ellenoff Grossman and Schole LLP Lowenstein Sandler LLP Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC O Melveny & Myers LLP Torys LLP Weil, Gotshal & Manges LLP Proskauer Rose LLP Skadden, Arps, Slate, Meagher & Flom LLP 2, , Debevoise & Plimpton LLP Sullivan & Cromwell LLP Baker Botts, L.L.P Gibson, Dunn & Crutcher LLP Goodwin Procter LLP Cahill Gordon & Reindel LLP Wachtell, Lipton, Rosen & Katz Pepper Hamilton LLP Polsinelli PC WilmerHale Manatt, Phelps, & Phillips LLC Latham & Watkins LLP Winston & Strawn LLP Brown Rudnick LLP Issuer Legal Counsel RANKED BY TOTAL DOLLARS ADVISED Rank Issuer Legal Counsel Total $M Avg. $M # 1 Jones Day $2, $2, Wachtell, Lipton, Rosen & Katz Simpson, Thacher & Bartlett LLP Skadden, Arps, Slate, Meagher & Flom LLP Torys LLP Latham & Watkins LLP Reeder & Simpson PC Cravath, Swaine & Moore LLP Goodwin Procter LLP Holland & Hart LLP Seward & Kissel LLP Kirkland & Ellis LLP Holland & Knight LLP Pryor Cashman LLP Polsinelli PC Morgan, Lewis & Bockius LLP Fenwick & West LLP Dorsey & Whitney LLP Greenberg Traurig LLC Foley Hoag LLP Gibson, Dunn & Crutcher LLP Schulte Roth & Zabel LLP DLA Piper Sidley Austin LLP Hogan Lovells RANKED BY # OF PLACEMENTS ADVISED Rank Issuer Legal Counsel Total $M Avg. $M # 1 Latham & Watkins LLP $ $ Sichenzia Ross Friedman Ference LLP Goodwin Procter LLP Fenwick & West LLP DLA Piper Davis Graham & Stubbs LLP Dorsey & Whitney LLP Sidley Austin LLP Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC Paul Hastings LLP Reeder & Simpson PC Polsinelli PC Morgan, Lewis & Bockius LLP Ellenoff Grossman and Schole LLP McDermott Will & Emery LLP Nason, Yeager, Gerson, White & Lioce PA Wachtell, Lipton, Rosen & Katz Cravath, Swaine & Moore LLP Kirkland & Ellis LLP Holland & Knight LLP Pryor Cashman LLP Greenberg Traurig LLC Schulte Roth & Zabel LLP Hogan Lovells TroyGould PC

6 6 Q Special REPORT Placement Agent Legal Counsel RANKED BY TOTAL DOLLARS ADVISED Rank Placement Agent Legal Counsel Total $M Avg. $M # Rank Placement Agent Legal Counsel Total $M Avg. $M # 1 Fried, Frank, Harris, Shriver & Jacobson LLP $ $ Latham & Watkins LLP Goodwin Procter LLP Ellenoff Grossman and Schole LLP Schiff Hardin LLP Lowenstein Sandler LLP Covington & Burling LLP Proskauer Rose LLP Ropes & Gray LLP Alston & Bird LLP Morrison & Foerster LLP Simpson, Thacher & Bartlett LLP Pillsbury Winthrop Shaw Pittman LLP Cooley LLP Olshan Frome Wolosky LLP Sichenzia Ross Friedman Ference LLP Miller Thomson LLP Troutman Sanders LLP Loeb & Loeb LLP Amit, Pollak, Matalon & Ben-Naftali, Erez & Co Orrick, Herrington & Sutcliffe LLP Faegre Baker Daniels LLP Haynes and Boone LLC K&L Gates LLP Murphy & Weiner PC RANKED BY # OF PLACEMENTS ADVISED 1 Ellenoff Grossman and Schole LLP $81.93 $ Goodwin Procter LLP Lowenstein Sandler LLP Fried, Frank, Harris, Shriver & Jacobson LLP Latham & Watkins LLP Schiff Hardin LLP Proskauer Rose LLP Sichenzia Ross Friedman Ference LLP Covington & Burling LLP Ropes & Gray LLP Alston & Bird LLP Morrison & Foerster LLP Simpson, Thacher & Bartlett LLP Pillsbury Winthrop Shaw Pittman LLP Cooley LLP Olshan Frome Wolosky LLP Miller Thomson LLP Troutman Sanders LLP Loeb & Loeb LLP Amit, Pollak, Matalon & Ben-Naftali, Erez & Co Orrick, Herrington & Sutcliffe LLP Faegre Baker Daniels LLP Haynes and Boone LLC K&L Gates LLP Murphy & Weiner PC Our Audience The Deal writes for bankers, lawyers, private equity professionals, hedge funds and institutional investors who crave sophisticated insight and PIONEERS IN DEAL JOURNALISM For over a decade leading strategic acquirers, lawyers and institutional investors have turned to The Deal for intel on transactions shaping the markets and how to drive their businesses forward. analysis on deals. Firms looking to connect with leaders in this space can work with The Deal to create unique marketing programs that resonate with these dealmakers. Learn more at Our Newsroom Focused solely on the research and reporting of all changes in corporate control, The Deal s journalists offer unparalleled perspective and insight on the deal economy. You can access this intel through The Deal Pipeline, The Deal s transaction information service. Learn more at Our Event The Deal Economy event is an exclusive gathering held annually at NASDAQ for senior dealmakers and advisers. Event keynotes and panel discussions focus on opportunities and challenges for the deal community in the coming year, with all sessions streamed live to a broader online audience. Learn more at