 |
|
IPO Story
Interview: Andre Peschong, Bridgewater Capital Andre Peschong has an extensive background in the evaluation of risks associated with specialized derivative transactions within the equity markets. He is currently a partner of Bridgewater Capital, an investment bank based in Newport Beach, Ca. He also co-manages the Oceanus Value Fund, which provides bridge loan financing to emerging companies. Mr. Peschong had some time for an interview with Current Offerings. Your fund is quite unique. What is the strategy? The Oceanus Fund can best be described by its mission statement. �The Fund's goal is to achieve significant returns by investing in public and private companies using a "Bridge Loan" strategy providing investors with the reduced risk associated with secured debt financing blended with the enhanced returns of venture capital investing�. What exactly is a �bridge loan�? A bridge loan is an interim funding transaction that enables companies to proceed with their operational plan while waiting for a much larger funding event. Typically companies would need this capital for specific orders or to complete a rollout of new product and/or marketing strategy. A bridge loan is a short term loan -- within 6 months. The loan also takes the form of a senior secured debt of the company. The interest rate is typically higher than a bank and has an equity component, such as warrants or stock, attached. What types of companies does your fund target? We look at all industries and geographic locations. We strive to allocate 70% of the portfolio into publicly traded companies in the United States with the balance being private companies. The slant towards public companies gives the fund an additional option of potentially converting the bridge loan into equity if the return is substantial enough. Public companies also give the fund a much earlier exit from the equity component thus allowing a shorter turn on capital and an enhanced return. What is a typical structure of a transaction the fund would consummate with a company? The fund would be a senior secured debt instrument of the company ahead of everyone else, except in some cases, traditional banking and A/R lines. We secure the bridge loan with assets both tangible and intangible. The term is usually no longer than 6 months and the fund has identified a takeout source for the bridge loan. Interest charged for the loan is 12% to 15% annualized and is prepaid for the term, along with an origination fee, at time of closing. The equity component is stock, warrants and/or options depending on the capitalization structure of the company and if it is public or private. The equity coverage can range from 50% coverage all the way up to 300% coverage. Why would a company take this type of financing? Many times companies find that during negotiations with a larger fund raise that they need some quick interim capital. Public companies are especially prone to this when negotiating a PIPE (Private Investment into Public Equity) transaction, secondary or an IPO. Private companies are also susceptible to this when negotiating with venture capitalists, angel investors, mezzanine funds and traditional banks. The main reason for a company to accept this type of financing is the speed at which a bridge loan transaction can be consummated and the management's belief that the costs associated with the bridge loan will far out weigh the costs on the larger financing. How much capital does Oceanus look to deploy in each transaction? A very good question! The best answer would be a large enough amount to be significant for the company�s operational needs yet small enough so as not to be problematic when being paid out of the larger capital raise. What is your due diligence process? With public companies it is much easier, almost everything is disclosed through SEC filings. Private companies are a little more difficult. The basic premise of our due diligence is the security of principal, the takeout comfort level and the equity upside potential. A basic due diligence methodology applies, such as a thorough look at the financial statements, accounts receivable and accounts payable aging, customer base, projections, background checks on management, growth potential etc. But the secret sauce is in the details and diligence associated with this type of financing while making sure everything is documented correctly. In some cases the legal documentation at time of closing is almost 100 pages. In your opinion what is the key to success for Oceanus? Definitely the deal flow. I cannot stress enough that deal flow, both quantity and quality, is the main advantage we have running Oceanus. What the limited partners are receiving with Oceanus is our experience, expertise and positioning. The principles of the investment manger each have over 15 years plus in this market. We have run PIPE funds, we have been involved with MBOs and LBOs, we have participated and structured venture capital investments and have a myriad of contacts that can assist the portfolio companies. What has been the biggest surprise that you did not initially anticipate? I would have to say the amount of time spent on due diligence coupled with the small percentage that actually get to the funding stage. We are seeing very good companies both public and private but we had no idea that as we dug deeper into the due diligence process that so many companies would not make the cut. That certainly has been frustrating but the companies that do make it through are that much better. How is the current environment for bridge loans? The environment could not possibly be better. With liquidity rushing back into the market we are seeing a renewed interest in capital raising transactions. The VCs are back with a vengeance, the LBO and M&A; markets are white hot again. European capital, which has literally been dormant for the last 2 plus years, has started to flow back into the US markets. This is the ideal environment to position bridge loans with good solid publicly traded companies as well as strong private companies. The hotter the market the more demand for this type of transaction. Who are your target investors and could they do this on their own? Our target investor is a high net worth individual who is looking for protection of principal as the main consideration but also wants to participate in the market upside. Prior to starting Oceanus we heard from a number of astute high net worth investors that they were still feeling gun shy from the last market run up and subsequent melt down. Hindsight is always a powerful tool. What we found was investors wanted 4 things: diversified risk, a senior financial instrument, potential for VC type returns, and liquidity --not necessarily in that order. An investor could do this but they would be forgoing 3 key ingredients, which are diversification, experience and deal flow. Those are significant barriers to entry. How are you paid and what are the costs involved? Oceanus Fund is extremely unique in its structure. First of all a potential investor has the ability to subscribe to one of two classes. Class A is the self liquidating class, which means that as deals turn in the fund the capital is not re-invested but distributed to the investors. Class B�s interest is re-invested for a period of 5 years, with quarterly redemptions available. The second unique feature of the fund is the investment manager incentive fee is not paid until the investors receive 100% of their original principal amount back. The split thereafter is 80% investors and 20% investment manager. The underlying management fee is 2% of net assets under management and a 5% upfront fee, which counts as a high watermark for the incentive fee. We decided to align our interests with those of the investors so we literally do not make anything until the investors receive all of their principal back. Would you like to add anything else? Yes, just to recap we believe that this investment methodology will bare the necessary fruits in any market, whether hot, flat or declining. We have aligned our interest with that of the investors and we have listened to what investors want. Consistent return of principal coupled with the advantages of VC type returns. |
