Private Placement Market Gets A Lift
The spate of private placement-related personnel moves suggests investment banks see opportunities in the asset class
September 25, 2009
A series of personnel moves involving bankers who specialize in private placements translates to a vote of confidence in the asset class from investment banks.
As first reported by IDD, Moelis & Co. hired Stan Lai as a New York-based managing director from Bank of America-Merrill Lynch, where he was a managing director and head of private placements. Lai had previously been part of Merrill Lynch's private funds placement group. Lai's appointment is part of an effort by Moelis & Co., known primarily for its M&A and restructuring advisory practices, to bulk up its capital markets platform, which will consist of five professionals upon Lai's arrival early next month.
Christopher Ryan, another managing director on the Moelis & Co. capital markets team, tells IDD, "We're helping clients figure out the best way to access the market and optimize capital structure, whether it be to issue debt or equity or recapitalize through our restructuring and recapitalization group. Stan's background is predominantly equity but the intention of our platform is to be product-agnostic and focus on what our clients need."
Moelis & Co. has been working on private placements of late. Some have been equity transactions and others have been bank loan-related deals with private distributions. Many of them have operated under 144A safe harbors, but are marketed like public deals. Ryan declined to name the issuers.
On the private placement front, Ryan predicts heavy primary equity activity, adding, "Over the next two to three years, I'd expect a re-equitization of balance sheets, particularly leveraged ones."
Meanwhile, Pali Capital recently hired Stephen Bonebrake as a managing director focused on private placements for public companies. He joined Pali from Libertas Capital Americas, and prior to working there he was head of equity capital markets at SMH Capital and head of European technology investment banking at Cowen & Co.
Bonebrake tells IDD that Pali Capital's private placement group is sector-agnostic, and while it would not turn down a potential deal for a private company, he and his colleagues prefer issuing for public companies. "We are optimistic about the space," he says. "From an issuer's perspective, a public company is able to raise capital in whatever form, in a confidential process and then announce it after it's been successfully completed. This gets rid of the stigma of a failed transaction in the marketplace and from an issuer's perspective that's a good thing."
Pali's equity capital markets group includes 120 professionals, so there are no plans for a major buildup of the firm's private placements team. "We are going to use people in our sales and trading organization to sell them," explains Bonebrake. "We cover over 1,000 accounts, both hedge funds and institutional investors. We already have the touchpoints to sell the securities, so we won't be adding too many people on the private placement side."
Montgomery & Co. announced earlier this month that it brought on Eric Wagner as a managing director in its technology investment banking group, where he will provide advice on M&A and private placements for growth companies in the technology space. In September 2008, IDD reported that Sherri Williams left JPMorgan Securities, where she was an executive director in the private placements group, to join Montgomery & Co., where she became a principal on the private placement team.
Also during the summer, placement agent Atlantic-Pacific Capital tapped Deutsche Bank professional Steven Tuch and Bear Stearns veteran Garett Stoffels to serve as co-heads of direct private placements. Jonathan Zald of Oppenheimer & Co. was recruited as an associate in the direct private placements group at Atlantic-Pacific.
In July, U.S. Bank launched an in-house private placement group by recruiting JPMorgan veterans Terry Martin and Jerry Kokal. Martin joined U.S. Bank in late June as a senior vice president and head of private placements. "On a relative value basis, private placements have held up very well compared to other asset classes," Martin told IDD sister publication Private Placement Letter in July. "There are some good things on the horizon; spreads are coming down, many of the big investors are coming back, and there will likely be a lot more refinancing activity as bank facilities burn off in the next year or so."
Martin also told PPL that a new group member could be added. In an interview with IDD this week, Martin said he and his colleagues are still in discussions with candidates and they are on schedule to hire a new team member by the end of the year.
In May, Houlihan Lokey announced it recruited Tad Flynn as a managing director and co-head of its finance group, where his responsibilities include working on private placements. He was previously head of the alternative capital markets group at UBS.
The spate of private placement-related personnel moves suggests investment banks see opportunities in the asset class. "Investment banks try to get ahead of what they see as a curve, and a pickup in private placement activity would not be surprising here given that valuations have come up with the stock market over the last three to six months," says James Mercadante, a partner in the corporate group at Orrick, Herrington & Sutcliffe. "Sellers of privately placed equity are now thinking, 'The stock market was 6,400 in March and it's close to 10,000 now,' so valuations are better. Buyers are saying, 'We've probably ridden out the worst of this,' so now a solid company can take advantage of more stable conditions that can turn into growth conditions over the next few years."
Mercadante has seen an uptick in private placement deals over the last month, though the transactions are for equity, not debt. He is also observing "situations where people feel like they can bridge an investment and go out and get debt financing to cover the bridge -- that tells you there's a confidence in some sectors that you can go out and get debt financing on a private basis, which wasn't there six months ago." Those issuances are mostly from the industrial and energy sectors.
According to Thomson Reuters, there have been 51 issues of equity and equity-related private placements, which have raised $22.5 billion in proceeds, in the U.S. so far this year. There were 217 issues which generated $97.9 billion in 2008 and 582 issues which raised $159.4 billion in 2007. On the straight debt side, there have been 573 issues so far this year, and they have raised $461.6 billion in proceeds, compared to a total of 714 issues and $335.9 billion in proceeds for all of 2008. In 2007, there were 2,736 straight debt private placements issued and $1.1 trillion in proceeds raised.
Private placements are one of the most cost-effective ways for boutiques to enter the U.S. capital markets, says a managing director at a mid-sized firm who works on private placements and requested anonymity. At bulge brackets, private placements look miniscule from a revenue perspective, but those groups cost little to maintain. "Private placements are high-margin, but they're low top-line," says the managing director. "A private placement group is just the people on that team working with the bankers, so you have very low costs and any fees you generate go right to the bottom line. A private placement team might be dealing with several million dollars worth of costs and if a good private placement team does between $30 million and $60 million in revenues a year, it's pure margin."
However, if large investment banks strive for between $500 million and $600 million in capital markets revenues, then private placement revenues will look very small, leading those firms to scale back on the asset class in tough times. "That's the trend that's happened at every major bank," the managing director says. "They want to de-emphasize businesses which have the least amount of impact from a revenue perspective, and they don't think private placements have much of an impact, but they're not saving much in the way of costs. The small shops look at that revenue stream and say, 'I can't believe you're getting rid of those revenues.'"
Smaller shops look at private placement bankers differently than other types of bankers they recruit from bulge brackets. "They see us as people who know how to do capital-raising soup to nuts and not just as a cog in the wheel," the managing director says. "Boutiques and smaller independents might be concerned that if they get someone from a bulge bracket, he only touched 10% of a transaction and doesn't know how the other 90% works. A private placement banker structures a deal, develops the investment thesis and marketing materials, reaches out to investors directly and sees it through to settlement."
Lower issuance of debt and equity private placements is due largely to economic conditions, and is not the fault of issuers or agents. But the sector is by no means dead. "I've heard several times over the last 20 to 25 years that the private placement market is going away, but the fact is that it always comes back, it always stays and there's always business," says Takashi Miyake, head of U.S. private placements at Mizuho Corporate Bank.
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