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Don’t Confuse Growth Capital Investment and PIPE Financing

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Last month’s Growth Capital Investor webinar on negotiating with hedge funds for financing included a discussion by the program’s panelists, Joe Smith of Ellenoff Grossman and Schole, and Adam Epstein of Third Creek Advisors, over the differences between most hedge fund-originated investments in emerging growth companies and those made by other types of investors such as private equity, venture and mutual funds. The primary difference being that most hedge fund investments should not be considered investments at all. As Smith noted, hedge funds using PIPE structures to invest in small cap companies are better characterized as financiers rather than investors – a critical distinction that company management and boards too frequently fail to grasp, or choose to disregard. Epstein makes the same point in his recent book on small cap corporate governance, “The Perfect Corporate Board”:

“Even seasoned directors and investors sometimes fail to appreciate that in the small-cap ecosystem there are investors and there are financiers….The routine failure of small-cap companies to make that distinction is significant because officers and directors wrongfully assume that any party that invests capital directly into the company is a “partner.” Financiers, though, are not in the partnering business….”

Hedge funds exist in a place in the financial markets which allows them to raise ungodly sums of capital from other investors so long as they deliver to them on two primary objectives: uncorrelated risk-adjusted returns; and near-complete liquidity. These mandates engineer hedge funds to go where the profits come hot and fast.

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daVinci Capital Group

Growth Capitalist Profile: daVinci Capital Group

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Growth Capital Investor’s editors sat down with Gary Post and Robert Winter of daVinci Capital Group, a newly-launched California-based growth equity investment firm  focused on fundamental investment in public emerging growth companies under $250 million in market cap. daVinci Capital stands at the vanguard of a new breed of emerging growth investor that is seeking to employ the equity private placement market to take significant, medium to long-term stakes in small, public, high-growth companies and help steer their development into profitable, liquid, and high-value small cap companies. GCI:  Describe the structure of your firm – are you a stand-alone fund, a fund-of-funds, feeder or seed fund, a sub-advisory, or something else? POST:   daVinci is structured as a fundamental private equity investor, not a hedge fund, to provide growth capital via minority equity private placements. We are looking primarily at emerging public companies, up to about $250 million in market value, but we can also provide expansion capital to private companies.