Where Has All The Capital Gone?
As we complete a difficult year in the investment markets and we approach the 15-month anniversary of the peak of the Dow Jones Industrial Average and the S&P 500 Average, I have reflected on the five quarters and the changes in the financial environment in this relatively short period.
Certainly we have seen a great deal of change in the financial markets, banking system, and mortgage lending systems of the
However, the most startling change I see is the overall lack of capital in the capital system of the
Banks have stopped lending and they are calling in loans as fast as they can in order to de-leverage. Investors continue their liquidating large amounts of capital in places they can—like the stock market—in order to de-leverage their balance sheets. Buyers of structured mortgage products are all but extinct. Hedge Funds have seen massive redemptions and are being forced to liquidate everything in their portfolios that is possible to be liquidated. And, the investing public is running for cover with as much cash as they can withdraw, liquidate or remove from the markets.
In this environment, the real casualty is the small-cap public companies of the world. A small-cap company is primarily reliant on capital for growth. In general, a small-cap company is formed to take advantage of an innovative concept and/or product offering. The purpose of taking the small-cap company public is to access capital that is generally more available in the public markets. Unfortunately, this capital, that should be more available, has disappeared because of the economic environment and those that will suffer the most are those that are completely dependant on capital to start, run and grow their business—the small-cap public company.
Given these traumatic economic conditions, what should the small-cap public companies do? First, they should take care of the cash they have; and, second, they should look for investor funds as quickly and from as many venues as possible—if they don’t it truly is a matter of corporate life and death.
Taking care of the cash that a small company has is not easy. It often represents choices that are difficult to make. Choices between differing opportunities that are great opportunities but the available funds are not available to pursue both or all opportunities. This forces a prioritization of opportunities that makes life difficult for a small company. Often, the first and most likely opportunity—for a small company—turns out to not be the best or most profitable opportunity. In this environment, management must choose and will not be able to pursue all opportunities.
Second, small companies must pursue all forms of investor funds as quickly as possible. The process is much more difficult and the process is much longer. The days of small-cap public companies choosing from many possible funding sources, along with the massive amounts of capital, is truly gone.
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