Wednesday, April 1, 2009

Welcome to the Private equity Trader!

Welcome to the Private equity Trader!

Who is Justin Davidson?

Justin Davidson joined One Communications (formerly CTC Communications) during 2001. He has been actively involved in portfolio companies owned by Columbia Ventures Corp. He has participated in five M&A transactions and one Chapter 11 turnaround operationally. These transactions included CTC Communications, Lightship Communications, CTBroadband, Choice One Communications, and Conversent Communications. Throughout these transactions Justin has provided the systems architecture for telecom management systems allowing for unmatched operating leverage. Prior to One Communications, he was a key member of building out the IT infrastructure for Cignal Global Communications, an International startup that entered 26 countries in just a few years and was acquired by UPC Europe in 2000 and merged into a subsidiary named Priority Telecom. From 1994 to 1999 he was a registered securities financial associate in which he raised millions of dollars from clients across the United States. He successfully researched, recommended and executed complex trading strategies that included stocks, bonds, mutual funds, and options. In addition, he is also an active real estate investor in the northeast.

Justin has obtained numerous certifications in the past such as the Accredited Asset Management Specialist (AAMS), Series 7 and Series 63, Cisco Certified Network Associate (CCNA), and Microsoft Certified Professional (MSP). He has earned a Bachelors of Science in Business Administration with a focus on Management Information Systems, Summa Cum Laude, from Northeastern University. He was elected to the Alpha Sigma Lambda National Honor Society, Golden Key International Honor Society, Sigma Epsilon Rho Honor Society and The National Dean’s List.

Justin also has achieved an MBA in Finance, Summa Cum Laude, from Suffolk University and was also an elected member of many additional honor societies such as the Beta Gamma Sigma International Honor Society, Financial Management Association National Honor Society, and one of only 20 to earn the Boardroom Scholar’s Round Table Award.

Justin is happily married with children.


Private equity: Would you like to get hit with a PIPE?

April 1, 2009

Private equity: Would you like to get hit with a PIPE?

You may if you are an investor in a public company that does not appear to show any possibility of recovering in your life time! A PIPE transaction is a “private” investment in a “public” company. The private investor purchases shares of the public company at a deep discount via a convertible security such as preferred stock. In many cases these transactions are private placements and do not need to be registered with the SEC.

Small to Mid-sized public companies explore PIPEs when they no longer have access to corporate debt and there is no public market for their securities, but they need money FAST. They are less expensive for the company to float than say a secondary stock offering to the public because of less stringent registration and marketing rules. Sometimes large companies become mid-sized and more often small when credit dries up!

So why shouldn’t they just buy the shares in the open market? Have you ever you’re your penny stock fly when someone just breaths on it? PIPEs allow the accredited investor (ie: Private equity) to acquire a sizeable position at a fixed or variable price verse pushing the stock higher in the open market. The transactions are very dilutive and thus de-value the existing shareholders. If you were a shareholder would you want to have less of a big pie or all of no pie when you see your stock holding slipping into sudden pink sheet death?

A “traditional” PIPE uses equity such as preferred stock issued at a set price. A “structured” PIPE is when convertible debt is issued instead of equity. Structured PIPEs have an obvious benefit of being higher up the flag pole if a company were to be dissolved. Both of these usually have a floating conversion price to protect their position against the “death spiral”.

By lighting up the stove PIPE a public company can recapitalize their balance sheet and do things in bad markets such as buy other companies in similar positions who have not heard of PIPEs. Go capitalism!

Justin Davidson

Tuesday, March 24, 2009

Credit Crisis: The Fox in the Hen house with the gate left open

March 24th, 2009

Credit Crisis: The Fox in the Hen house with the gate left open

In my opinion, the reason for the current credit crisis is because the Glass-Steagall Wall Act was repealed in 1999. Once lending banks and investment banks were allowed to merge and do business without the “firewall” it created an environment where poor asset management decisions were encouraged. Like the investment environment prior to the Great Depression, financial intuitions ended up lending money at rates almost less than what they were taken in deposits. A bank run during the Great Depression was just modernized with a run on mortgage backed securities alongside option trading.

The Glass-Steagall Act of 1933 was established by the FDIC to put a “firewall” between what a lending bank does vs. what an investment bank does such as trading. On November 12, 1999, the Gramm-Leach-Bliley Act repealed part of the Glass-Steagall wall Act opening up competition among banks, securities companies and insurance companies. The Gramm-Leach-Bliley Act allowed commercial and investment banks to consolidate such as merging Citibank with Travelers Group forming Citigroup to later combined operations with Smith Barney and a few other investment banks. At that moment in time, I recall President Bill Clinton stating that this repeal act allows banks and investment banks to be better able to compete against global competitors during the globalization error.

Earlier, the Savings and Loan (S&L) crisis had occurred in 1976 and again in 1980 mainly due to un-sound lending practices with loose credit terms. Banks were lending at say a 2 point higher interest spread than what they took money in from deposits. Many of these mortgages were fixed rate mortgages while the money coming in from deposits was at a variable rate. Eventually, longer term mortgage rates stopped declining for a period and shorter term interest rates started to rise ultimately eliminating that “net interest margin”. Banks who have many fixed rate loans were supposed to use interest rate “swaps” to swap their fixed rate interest streams with other banks for a variable rate stream. This allows a banks rate to rise with shorter term interest rates that they paid depositors for money to lend. To make up for these losses banks start to enact higher non-interest rate fees such as ATM fees, etc.. Ultimately, the S&L banks ended up with a bunch of toxic asset loans with a negative net interest rate margin.

On August 9, 1989, the Office of Thrift Supervision (OTS) was established as an agency of the United States Department of the Treasury. It’s the primary regulator of federal savings associations.

In 1989, The Resolution Trust Corporation (RTC) was a United States Government-owned asset management company charged with liquidating assets that had been assets of savings and loan associations (S&Ls) declared insolvent by the Office of Thrift Supervision. Between 1989 and mid-1995, the Resolution Trust Corporation closed or otherwise resolved 747 thrifts with total assets of $394 billion. This is not that much different that what is being proposed by the current President Barack Obama administration in which the government will purchase the toxic assets from the bank and liquidate them to willing buyers such as Private equity firms at discounted rates.

To summarize, if the Glass-Steagall Act of 1933 was still in place the investment banks that have been around for hundreds of years would not have blown up due to mortgage lending. The OTC would have stayed effective keeping lending institutions in check and asset management departments within lending banks would have been more cautious as to how they managed their capital structures due to regulation consequences.

Justin Davidson

Here are a few interesting topics:

- What is the difference between Private equity and Venture Capital?
- What is Mezzanine capital?
- What is convertible debt?
- What is Preferred stock?
- What is a "term sheet"?
- Should I raise equity or debt financing?
- What is an asset based loan?
- What is a Hedge fund?
- Is DIP financing a good thing?
- What is a PIPE transaction?
- Should I use just VC or should I use a blend of the private capital lines? (see right)

Venture Debt - The Other Green Money
5 Reasons Convertible Debt Sucks
Should I raise debt or equity?
The Science & Art of Term Sheet Negotiation
Venture Debt for Startups
Top 10 Tips for Entrepreneurs Piching VCs
Convertible Debt Jeopardy
Preferred Stock Term Sheet (sample)
Finders Fee Agreement (sample)
Private Equity

My ideal target:
- mid-sized company ($20mm - $250mm)
- intellectual property patents
- customers on contract
- maturing revenue
- large available growth market
- low productivity (rev/emp)
- fragmented industry
- high barriers to entry
- lack of organized information systems
- un-organized product lines
- confusing brand value proposition
- poor internal metrics
- low debt structure
- under capitalized
- poor leadership
- limited sales channels
- limited suppliers
- mis-incentivized corporate objectives
- some unprofitable customers

It's hard to improve something that is already perfect.

Are you an accreditated investor looking to participate or a company looking to be saved? Shoot me an email.

Private equity and Venture Capital