Mr. Kann as a microcap/nanocap equity expert how do you see the current liquidity environment affecting capital raising efforts for these companies?
Kann: Well, the current liquidity problems, which are acute, in the overall market simply exacerbate the persistent liquidity problems, which are chronic among most microcap and nanocap stocks. When a company goes to market to do a capital raise, investors are typically evaluating the company through a three-piece risk filter: execution risk, market risk, and liquidity risk. Execution risk is simply a question of whether or not the investor believes that this particular management team can execute on a compelling business plan (this presumes that I and have sifted through enough bad business plans to find the one that is compelling enough to commit resources to). Execution risk also speaks to questions of barriers to entry, defensible intellectual property, market positioning of products, etc., which will give a good management a little wiggle room should them misstep or be delayed in executing. Overall market risk has to do with factors like negative investor sentiment or a moribund economy, which usually leads to money sitting on the sidelines or, worse, money being pulled out of the market entirely, creating additional downward pressure on equities. Additionally, perceived market risk informs the calculation an investor makes about choosing between alternative investments, which in down markets often leads to a flight to quality such as; tangible assets, bonds, precious metals, cash, etc., making fewer and fewer dollars available to support stock prices. This leads to liquidity risk, broadly defined as can I get out of an investment position at or above the price I am paying now. In the current market, it is a question of whether more money is going to be sucked out of the system (decreased demand for equities) - and for how long - creating an ebbing equity tide that sinks all boats. The more persistent issue which is the lack of liquidity in small stocks is simply that there is such little information efficiently distributed on microcaps that, by definition, demand - money available to support such stocks - is light. This creates liquidity risk for the investor in the best of markets, let alone the worst market in my 21 years in the business. How comfortable are most investors going to be putting, say, $2 million into the private placement of a company with a $5 price and a $50 million market cap, and which trades just 5,000 shares a day, which would theoretically take him 80 trading days to get out of “IF” he was the only seller? Most investors are going to bite the bullet and accept execution risk and overall market risk, but it’s the lack of liquidity, the perception of not being able to get out of a position with one’s skin, that keeps more microcap companies from raising capital more than anything else.
What industry sectors are seeing more activity and what are seeing less in capital raising?
Most investors and even most professionals run in herds, following the crowd into what they think is hot NOW, so you’re seeing a lot of money chasing alternative energy plays and deals related to or servicing “old energy.” Recently, I have probably seen six coal deals, five oil services deals and three wind farms within the last 90 days. The real trick is to try and get a deal done that has anything whatsoever to do with discretionary consumer spending and you’re in for a lot of headwind. Professionals are making “this can’t get me fired” investments and John Q. Public is making “my wife can’t complain that I bought this” investments.
In this volatile environment where would you be looking to deploy capital?
I tend towards fundamentals and a long term investment horizon, so I am unfazed by this or any market. I’m simply looking to get behind companies with great proprietary products in established and growing markets, marketing plans that make sense and most importantly seasoned management who have been through some cycles and have realistic expectations and game plans. For the long term, I like unique healthcare plays poised to take advantage of the aging world population, especially baby boomers, who just started turning 62 this year. I am also not afraid of mixing some earlier stage, higher risk deals into my portfolio to boost long-term returns.
When do you see the market coming back for small cap IPO?s?
When investors, large and small, start making money again. Timing could be another 12 months, hopefully sooner, but a lot of it has to do with extrinsic factors like the elections, unemployment and market sentiment. The overall market simply has to get healthier and individual investors have to have more confidence in the economy so they can see parting with that $5,000 for an IPO that they had been saving for when they got “downsized” out of their job. And professional investors have to be able to justify making bets on new companies, which is hard to do when, as currently, many of the biggest and best companies in the world are trading at multi-year or even multi-decades lows.
Last but not least what is your favorite quote that relates to the business?
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” - Warren Buffett
Mr. Kann has been in the market for the last 20+ years in some form or fashion and has tremendous insight into the smaller tier companies. He published a market news letter that highlighted undervalued and special situations companies that have done extremely well since being highlighted. He has years of experience in structuring and raising capital for companies of all sizes. Here is a link to Steve’s Linked in page that will give the readers a better flavor of his background. http://www.linkedin.com/in/stephenkann
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