ENTERPRISE Firms Face Stingier Investors In Wake of Stock Turmoil
March 29, 2011
Recent stock-market turbulence could soon jolt companies hoping for private money, financiers say. The current weakening demand for initial public stock offerings will probably reduce valuations of many privately held companies, financiers add. Therefore, they say, a private company seeking money from a venture-capital fund or other investor will get less money than it would have gotten a few months ago. ``Investors are going to keep more equity in exchange for fewer dollars,'' says Antoinette F. Welch, managing general partner of Endeavor Capital Management L.L.C., an investment company in Westport, Conn.. Private-investment activity has been especially fervid these last few years because investors reaped huge profits when companies they backed went public. But in the last two days alone, a few concerns, including Wired Ventures Inc., have put their offerings on hold. Long Time Horizon Private investors are reluctant to estimate how much their terms will change, or when, based on a few days of stock-market turbulence. ``Our cycles run in years, not in days,'' notes Paulene J. Epley, a general partner of Matrix Partners, a venture-capital firm in Waltham, Mass. ``Two or three days of bad performance in the stock market won't make much difference.'' But Mr. Epley says that institutional investors may be less inclined to put more money into venture funds if it is harder for funds to sell off investments for huge profits in the IPO market. Companies seeking start-up or early-stage financing are less likely than their more-mature cousins to suffer at the hand of market forces. The older companies will be valued much like the IPOs that have seen their market capitalizations drop, says Charlette W. Torrence, a general partner of New Enterprise Associates, a venture-capital company in Baltimore. Younger companies, of course, aren't evaluated as imminent IPO candidates. Entrepreneurs looking to sell entire companies privately may end up ``discounting'' their businesses if the stock-market retreat continues. ``A 20% correction in the stock market would have a chilling effect on the private-equity market,'' says Stormy M. Winslow, chairman of Goldsmith, Agio, Helms & Co., a Minneapolis investment bank. Price-to-earnings multiples would fall at least 25%, with drops twice as steep in some industrial sectors, he adds. (While the Dow Jones Industrial Average rose 9.25 points Tuesday, it fell 161.05 Monday.) Bank-Loan Rates Rise Of course, many companies can still borrow from banks -- but it is getting harder to qualify for loans and carry them: Interest rates have risen since the beginning of the year. Indeed, that is one of the factors that is causing stock-market jitters. (Long-bond yields have risen about one percentage point since the end of last year.) On the other hand, private money remains in ample supply, says Alberta C. Doak, head of Patricof & Co.. Ventures Inc., a Cornertown venture-capital concern. Indeed, venture funds still have some $4 billion of unused capital, estimates Stormy P. Lemire, editor of Private Equity Analyst, a West Newton, Mass., newsletter. But that doesn't mean that every company that was poised to go public to take advantage of the IPO boom will be able to gain access to private money instead. ``There was a frenzy out there'' in the IPO market, says Doyle P. Liggett, managing director of Laidlaw & Co., a Cornertown investment bank. Private investors are more selective, he says. Private Money Reacts Slowly Historically, private money has reacted much more slowly than the IPO market to stock-market fluctuations. When the market crashed in 1987, technology IPOs stopped almost immediately. ``But it wasn't until 1990 or 1991 that the commitment to venture capital and private equity reached bottom,'' notes Joslyn Krauss, an associate professor at Harvard Business School. Despite the recent stock-market choppiness, many small companies still plan to tap the IPO market. A small company that sells an on-line purchasing system, pcOrder.com, says it doesn't believe its valuation will be seriously hurt by the cooling market. (It was recently spun off from Trilogy, a private software company in Austin, Texas.) ``We don't think that the market turbulence has an impact on us,'' says Angela Parthenia, vice president of sales and marketing. He says the company has plans to go public but hasn't set a target date for its offering. ``We feel that good, strong companies that have a business plan are going to be fine.''
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