I continue to speak to a large number of small-cap public companies that are in the process of raising funds to continue operating and growing their companies. I can hear the optimism in the voices of the CEO’s and CFO’s. In most cases, I am not acutely familiar with the arrangements they have, nor am I involved in their fund-raising process. However, given the political, economic and capital market environment that exists in the world today, I have a difficult time sharing the optimism that funds will be easily raised by small-cap public companies any time soon.
Unfortunately, companies of all shapes and sizes are having a difficult time raising capital to continue operations and to take advantage of growth opportunities. It seems that all of the funds that banks were so eager to lend, just twelve months ago, has somehow disappeared from the balance sheets of the banks. Hedge funds and private equity funds have seen massive withdrawals, in fact, most leveraged funds have seen margin calls and in most cases, changes in the margin requirements and costs of margin borrowing.
These rapid changes have caused a massive de-leveraging of the balance sheets of banks, financial institutions, hedge funds and private equity funds. Money that was available for investment has been returned, never to be available again in the near future. This type of massive, global de-leveraging event can take years to complete and will impact most small-cap and mid-cap public companies in very profound and life-changing ways.
I applaud those CEO’s and CFO’s with continued optimism that their funding event will be completed in the next few weeks; unfortunately, I cannot imagine how.
The ripple effect of a massive de-leveraging of a global economy is not something that we have seen before. Even in the 1930’s the de-leveraging took nearly ten years to complete the cycle when the economy was fairly regionalized and the leverage was a much smaller percentage of the economy. Beyond the intervention by the world governments, how long does it take to complete a de-leveraging cycle?
The average bear market lasts twenty months—we are twelve months into the current bear market. The average recession lasts nearly two years—we are possibly six months into this one. The last de-leveraging cycle of the 1930’s lasted nearly ten years—we are one year into this one.
For small-cap public companies, risks abound; the risk that a customer decides not to buy, the risk that a product doesn’t work as well as originally thought, the risk that management or sales cannot execute on the business plan. However, the risk that capital is not available to fund the operations and growth of a company is absolutely deadly. We will see many small-cap and large-cap companies close their doors precisely because the capital was not available for them to continue in business.
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