“We’re seeing more Microcap transactional business than we’ve seen in five years,” David Bukzin, Partner at Marcum tells Private Equity Strategies, in a conversation about Microcap companies. “We’re seeing that activity across all types of transactions, IPOs, SPACs.” Bukzin works with a number of Microcap companies and private equity firms as an accountant for Marcum.
“The markets have gotten to a level where the recovery is starting to trickle down to the smaller companies. Microcap companies are the last to see the upside and the first to feel any backslide.” In our last Microcap Monitor in June, we highlighted DelMar Pharmaceuticals, a company that is working on clinical trials for an orphan disease efractory glioblastoma multiforme (GBM), the most common type of aggressive brain cancer. At that time, life sciences companies as a group were popular with investors and they still are. According to Bukzin, life sciences and technology companies continue to dominate investor interest.
“The Microcap IPO market is coming back,” he says. “These IPOs are companies with under $500 million in market value, and are in these sectors. We’re even hearing rumblings that people are exploring China again. They are looking at what companies want to go public now that a lot of them have gone dark.”
He notes that recent changes in regulation like those to Sarbanes-Oxley have improved the options for Microcap companies. The JOBS Act is also playing a limited role in terms of marketing. “Some of the companies going public now are taking advantage of the JOBS Act, but it really has had little to no effect when it comes to gaining access to capital. What has helped are the changes to Sarbanes-Oxley. Regulations overall, are a balancing act. I think SARBOX was actually helpful in many ways. But the way they’re writing some of these crowdfunding rules, they can open you up to fraud.”
SPAC’s come back
Special-purpose acquisition companies, or SPACs, are starting to become more frequent Bukzin says. Typically SPACs are a type of structure reserved for economies that are booming, but even with anemic growth, they too are coming back along with IPOs. SPAC issuances rely on IPOs to raise capital, and a few successful transactions have emboldened others to jump in.
According to research done by attorneys at Appleby, for Legal Week, “the largest such deal was the $905 million Platform Acquisitions IPO, a special purpose acquisition vehicle incorporated in the BVI and reuniting founders Martin Franklin and Nicolas Berggruen, who were previously behind the 2012 IPO of Burger King using a similar special purpose acquisition company (SPAC) model.”
Bukzin notes that the type of investor for a SPAC transaction is different from a typical IPO investor, “the IPO is more subject to market conditions, in a SPAC the equity has already been raised. With the IPO, you have to get through the SEC before you deal with the market to raise your capital. The SPAC is more institutional in nature, with an IPO you’ll see more retail investors.”
Bukzin recently gave a presentation at the JMJ Financial Summit in Las Vegas, Nevada where he highlighted some accounting changes on the horizon that could impact Microcap companies. The Public Company Accounting Oversight Board is set to have a public roundtable next year that could change the auditors’ opinion from pass/fail to something more qualitative. The proposal would add more communication to the auditors report about issues that came up during the audit leading to the opinion.
The Financial Accounting Standards Board (FASB) is also considering some regulatory relief on reporting for development stage companies. Those changes would affect mostly pharmaceutical, biotechnology, and technology companies. Based upon current rules it is difficult for companies to emerge from development stage to an established operating company because current guidance requires meeting the same reporting guidelines as an established operation. The FASB is looking at ways to make these reporting requirements easier for development stage companies.
These rules and a more liquid market environment are bolstering Microcap activity. “We’re seeing clients who are now able to get capital in the last six months, where they haven’t been able to for the past five years,” Bukzin says. “There’s an arbitrage in Microcap because of the lack of liquidity, which creates a lower valuation and private equity firms can take advantage of that.”
Research submitted by Perritt Capital Management following this article goes into those issues in detail. Watch this space.
This article was published in Opalesque's Private Equity Strategies our monthly research update on the global private equity landscape including all sectors and market caps.