Monday, March 8, 2010

YA Global -Yorkville + Cornell- Many Names, Same Games

The Cold Truth reported earlier this year that sources close to the SEC allege that Mark A. Angelo and Matthew Beckman – key people at Yorkville's PIPE fund (aka/YA Global + aka/Cornell Capital Partners)– may soon be hit with inquires. Yorkville Advisors, wants to make as much as $400 million this year by offloading firms it was forced to take private in the credit crisis. Is this a possible attempt to circumvent appropriate GAAP standards, as many former client companies were taken off the public funds books and purchased by an entity most believe is controlled by Agnelo & Beckman who are now seeking buyers amid improving market liquidity.

YA Global (aka/Yorkville/Cornell Capital) makes direct loans typically to nano and micro cap public companies. The recent credit crisis led to tremendous problems for all financiers in this space. Prior to 2008, Yorkville had already seized collateral on more than 12 occasions and saw that number rapidly increase during the recession as the over-extended companies in their portfolio struggled. Like most financiers in this genre, the firm is typically at the top of the capital structure- meaning all assets belong to the financiers in the case of bankruptcy, but there will still be an arduous road ahead including many bankruptcy proceedings along with the associated lawyers fees and court dates, in hope of collecting its collateral- collateral whose value may be in question.

The cold truth is that smaller companies, by nature, are the most dependent on capital, a fact their financiers are well aware of. Typically these small businesses are willing to endure the most onerous of terms. At issue, during the credit crisis amid investor withdrawal, many of the financiers were forced into the position of picking and choosing which companies to fund with the few dollars that were being returned via the depressed micro cap trading markets. This led to many small companies folding and then the unavoidable write downs. It also led to what may be construed as questionable accounting at YA Global as certain assets were funded, certain assets written-down and yet others taken private, all leaving the investors wondering- 'what exactly is going on here?'

According to Tom Anderson, director of investor relations, said YA Global Investments LP had taken $200 million in writedowns in the last 18 months due to companies in its 100-name portfolio defaulting. Now they want to sell the 12 to 15 companies that they took control of due to loan default. According to an 'independent valuation' - (we have not been able to determine who this independent evaluator is, nor do we know the process utilized to make the valuation determinations)- the portfolio is thought to be valued at approximately $400 million.

The defaulting companies' portfolio consists of market capitalizations that range in size and include a cross-hatch of sectors: technology, consumer, and energy companies- all based in the U.S. Tom Anderson believes the YA Global has several options, "We've been approached by private equity firms looking at some of the positions we have, and oil and gas companies looking at our energy concerns," He also made it very clear that one possibility, that is being very seriously considered, is to re-list these companies.

We understand at this time, in the micro cap market, there are several investigations, by multiple agencies into several of the largest financiers, marketers and promoters. The SEC, the US Attorney and the FBI, all of whom are addressing issues including: questionable valuation's, return profiles, write-down's, kickbacks and inappropriate off balance sheet transactions. It seems when it comes to investigating the micro cap market, the facts aren't always well known, one thing we know for sure- the resources that have been allocated to clean up this marketplace up-just don't know their way around the neighborhood. The unfortunate fact is that many who eat, live and breath this micro-cap market cant believe that such great government resources have been so poorly allocated for so long toward the wrong targets.

42 comments:

  1. Timothy, truth is cold as death.

    But when one has wrong accusation that’s cold, too.

    We have seen this lately in recent a case – the potential criminal charges in another PIPE fund – NIR Group.

    Funny, but in that case WSJ has incorrectly reported many facts (http://online.wsj.com/article/SB10001424052748703795004575087951450071156.html#articleTabs_comments%3D%26articleTabs%3Darticle ) WSJ guys were wrong about the scope of the investigation and in addition, the WSJ incorrectly stated that the independent valuations have not been properly documented. All this info was unsubstantiated.

    Sometimes even good reporters are wrong...

    Now what all these two stories tell us about?

    The core of the PIPE’s industry has been more affected by the financial crisis than any other fund sector.

    Fund managers utilized provisions in their Private Placements allowing for restructure of the original investment vehicle, which should serve to protect the investor from a “run on the fund” & lead to a more orderly sale of positions and redemption process. It seems the PIPE’s market may have a very long and arduous road ahead, if not troubling.

    As a company grows they have the ability to utilize various markets of money –private & public. In order for a company to grow, they must be funded. As you state micro or nano-cap companies rely on the capital provided for their survival - typically they lack the cash flow necessary to operate in the long run.

    It is a cold fact that roughly half the capital invested in the PIPE’s market was requested for redemption during the financial crisis. Money that had flowed in over 7-10 years was being requested and redeemed all at once. A REAL black swan has appeared - a situation impossible to manage.

    This is the same capital that was being utilized to fund nano- & micro-cap comp that relied upon this funding to survive. W/ frozen credit markets, yet massive net redemptions the issue becomes obvious - how will all these companies operate on half as much investment?

    The answer is as obvious, they cannot. The numbers simply don’t work.

    ReplyDelete
  2. The easy answer is to fund half the companies or maybe fund all the companies, half as much. Or, you could choose the strongest companies, fund them & let the rest fold. There are many possibilities. Sounds like a Sophie's Choice of investment management - who lives & who dies. Each decision affecting people at every level, from the workers at the companies that will no longer have jobs and become part of the exploding unemployment #, to the wealthiest investor - who paid taxes on gains that cease to exist.

    Only one reality - these decisions were real and needed to be made immediately w/ no past history for guidance.

    During this crisis managers all over the world, including the Fed, were put in the position of asking themselves “hard questions.” Many of these questions had no answers, in fact, most had no answers, but theories were being debated daily on CNBC, MSNBC & most importantly in Washington.

    Many of these questions were answered in theory and conjecture as are typically the only way to answer questions regarding uncharted territory.

    Managers theorize their way through this uncharted territory, just like the Fed had to with AIG, Lehman, Bear, ML, B of NY...but they had the luxury of access to money. The ONLY access to money, literally at that time. Only history will be able to judge what was done “right” and “wrong”. Lehman? AIG? Who knows...???

    TARP’s, TALF’s, restructures, new management, all with a common goal of strengthening the economy and all utilizing a theorized plan.

    A PIPE’s manager has to restructure without a TARP or a TALF and has to do it in the face of mass redemptions, lawsuits, investor ire and government scrutiny.

    Managers at every level, did they best they could w/ what they had available. Left in the aftermath with no follow on investment + scrutiny, especially ongoing + unsubstantiated, which tends to instill a massive lack of confidence in ones investors & only leads to reputation issues, law suits and further redemption, all of which devalues the underlying portfolio further.

    The reality is that there was a flaw in the strategy. One that would most likely never have been exposed if not for the financial crisis. This is an inherent risk that comes with investing - just like what happened in CDO’s - it was a risk - it was exposed - lots of money was lost.

    When money tightened and froze, these micro cap companies & more specifically, the funds investing in them were left with terrible decisions to make.

    Nobody is happy & everybody blames the manager.

    ReplyDelete
  3. If YA Global took $200 million in write downs over the last 18 months and they have $866 million in assets under management, how did they make 59% in 2009? Your right, the numbers don't add up and who do you blame for this financially engineered off shore PIPE fund? Certainly not the ones who created, ran and profited off this over the last 10 years!

    ReplyDelete
  4. @Jake

    Look at this interesting development.

    The latest PIPEs newsletters http://www1.dealflowmedia.com/issues/pipesreport/8_5/fullpdf/ published today, March 16th, cites attorney Mr. Perrie Weiner from the LA’s DLA Piper office who comments on the current SEC investigations about PIPE funds valuation practices.

    Mr. Perrie Weiner elaborates that there are number of SEC investigation concerning hedge funds that are focusing on hedge funds how they are valuing illiquid securities such as convertibles and warrants. DLA Piper considers that there is no merit to any of these investigations as in all the cases that the lawyers have reviewed there is no examples of fraud.

    The report goes with a special review of the current SEC investigation of Corey Ribotsky’s NIR Group. Further it provides clarification that the illiquid nature of NIR’s private placements investments shows why valuations were such an issue in the PIPE market. Some 94.5% of the PIPEs NIR funds invested in were from companies with market caps of less than $50 million. And in 95.5% of the NIR’s investments, the find purchased convertible debt securities. In only 1.1% of its deals did NIR receive common stock.

    Seems to me that all we are going to see here is one more time that taxpayers’ money will be wasted in this investigation and thrown in the wind.

    ReplyDelete
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