With the recent market volatility, I thought id address some of the issues that private or unlisted companies face when raising capital.

At the core of any capital raising is investor sentiment. There are few investors we know who are not affected in some way by the state of the markets. This however does not affect the number of deals seeking funding. In fact we are seeing more than ever before.

Private investors are affected in two ways by public market uncertainty:

1. They usually have a portion of their portfolio in the listed space. Usually in a spread of blue chips such as banking stocks, telcos, miners and so on. These are long term buy and holds therefore they have no selling strategy meaning they would still be holding. Although it may be a paper loss, they still feel they have lost some money and therefore are hesitant to invest further into anything. Usually these investors carve off a portion of their overall portfolio, say 10%, to invest into higher reward deals such as angel investments, pre-IPOs and the like.

2. Even if they have no exposure, they are affected by the negative market sentiment because of the risk associated with investing in general.

Now lets take our average punter who is out there trying to attract investment capital – trust me there are many. There job has just become that much harder because of the new market conditions. Therefore they have to be the best of the best. Unfortunately most fall well short.

Few are investor ready and lack many of the elements that would attract an investor.

Exit is usually one of the first things that investors look for. They want to know how they are going to get out!

There are only really two main ways to exit. Trade sale and IPO. IPO is less of an option at the moment as most of the new floats have been delayed. Investors see that an IPO exit is less feesable in these troubled times. Where as 12 or 18 mths ago, it was a really way out for most companies.

So whats the solution? Well if you are looking for capital, quite simply you deal has to be head and shoulders above others. There are number of ways you can achieve this:

• Lower your valuation
• Write a better IM
• Define your exit strategy and do some research of other similar company exits
• Projections – make sure you have some and they are realistic!
• Make sure your IM looks professional. Spend some money on a designer
• Keep your IM to less than 20 pages. Investors see up to 10 a week. If its too big, they wont read it

Over the last 6 months a couple of interesting things have happened in the private space as a result of the public markets. The market turmoil (and losses) mean that there is less desire for investors to commit any capital to new investments. As a result, brokers are advising clients to not try the IPO rout. So more companies are looking to raising capital privately. So there demand to raise investment capital from the private sector has increased. As a result, we are seeing more deals than ever.

More deals means more competition for the investment dollar. More competition means you have to stand out when you offer hits the desk of a potential investor, otherwise they will simply push it across the desk and into the bin.

This means Entrepreneurs and promoters have to be more “investor ready” than ever before. We are not seeing this.

In fact because of the higher dealflow, we are spending less time assessing each transaction, often flicking them within minutes if they do not appear to “tick all the boxes”. We are probably having meetings with one in 20 proposals that we see. We might end up working with one in five of the people we meet with. So that works out to a ratio of about 1 in 100.

For those seeking capital, here are a few tips which might help you proposition stay on the investors desk for a little bit longer:

·        Make sure persons stated to be Directors are actually appointed and ASIC has not been notified

·        Make sure your current shareholders have been issued shares and are registered with ASIC

·        Ensure your Intellectual Property is legally owned by the company seeking the funding…it is often still registered in the name of the founder

·        Prepare a set of financial projections supported by thorough details and assumptions. Ideally these should be prepared by an accountant

·        Don’t be too optimistic with your projections. Investors are very skeptical of too much blue sky. They see it all too often and it’s a big turn off.

·        Make sure the structuring of the company/group has been thought through with assets and trading activities in separate companies, thereby giving asset protection to the IP.

·        If there is Key Man risk, make sure Key Man insurance in place. I.e. if the founder/entrepreneurs dies, has a serious accident or is incapacitated from working in any way, the investors money has to be covered by insurance. Any decent insurance broker can assist here.

·        Be upfront with any liquidity issues. Investors and advisors don’t like surprises

·        Allow plenty of time to raise capital. Minimum 3 to 6 months! Many companies believe that the funding will “come in tomorrow” with little realism for how long it takes to get the proposal to investors and the timetables of investors

·        Base your valuation on the “real world”. Get some accountants advice on this. If you simply base it on the basis of “how much money you need for how much of the company you want to part with” youll end up with a valuation that is out of sync with the market place. Do some research and find out with similar companies were sold for or raised capital at.

If you can work to cover off on these issues, and highlight them in your proposal, your chances of attaining funding will increase dramatically – maybe 10 fold.

The sub-prime crisis in the US has a knock on effect to other financial sectors and stock markets globally as many large companies, such as ABC learning, have used cheap debt to grow. This all started because large US mortgage lenders have been on selling their debt and without the equivalent asset value, hence the big problems we are seeing today.

Any listed company with any exposure or even perceived exposure to debt or the US sub prime market has taken a beating from investors who are scrambling for safety. In many cases this has sent the stock into free fall. Allco is probably the worst example of this, falling from a peak of over $12.61 a year ago, to a low of just $0.33!

Im sure by now there are some listed companies who wish they were private right now.

Soundings from Private Equity groups around town are that they are in the box seat and are now looking at purchasing assets at much lower prices, although they are not able to gear up as much as they did last year. Plus their private investments are not at mercy to the sharemarkets wild volatility and unpredictability.

What we are likely to see is more smaller investors taking the Private Equity approach to their investments by investing into quality private companies who have strong upside potential and good management to take them there.

Yes these deals are harder to find but because of this, investors will be forced to be more savvy when parting with their money. Rather than simply ‘punting’ on new IPOs and ‘hot tips’ with little time spend on investigating the company before making an investment.