GLOBAL - Exclusive: A Denver-based investment boutique is offering European pension schemes access to the US small-cap sector through what it claims is the world's first "hybrid" public-private equity fund.
Keating Investments has launched a reverse merger fund as part of a wider effort to penetrate the European market and the current appetite for uncorrelated returns.
Reverse mergers are an alternative technique to an IPO (Initial Public Offering) and are widely used by small-caps because of their speed and cost-effectiveness. Many investment banks have also become increasingly reluctant to proceed with small-cap IPOs. In fact, the market is deemed by some observers as shut.
But according to Luca Toscani, a founding partner of Keating Investments - which has also been active in hedge funds - this is the first time the method has been encapsulated in a fund.
“Reverse mergers themselves are not new, but we are the first to set up a fund structure as a joint venture between the investor and the broker-dealer.”
As a JV, the fund allows for profit from both investment and banking fees. This could be as much as a 10% stake in the company’s common stock.
Essentially, the fund works by investing in what Toscani classifies as “early stage public companies with a high potential” through twelve month bridging loans. These usually finance the private-public transition and are then recycled or taken out by follow-on offerings once the company is public.
The firm stresses that it does not deal in “risky” micro-caps but only companies that have at least US$10m in revenues and are able to meet Amex or Nasdaq Small-cap exchange listings within a few months.
“We are not really private equity investors in the traditional sense. We are dealing with something that is very close to the public market,” said Toscani.
“These are late-stage companies [and] we simply want to capture the private equity valuation. Once we make the investment it is in our interests to take the company public as soon as possible, which usually happens in a matter of weeks.”
At any given point, the fund can be invested in five to 10 companies.
Toscani added that investors can expect an ROI (return on investment) starting at 30%, year on year.
The fund has so far secured some $4m, largely from high net worth individuals.
Toscani believes that because of the comparatively small sums of capital, the fund is best suited to smaller European pension funds looking for entry into the US small-caps market. It is also open to other private and institutional investors worldwide as well as companies looking to be lifted in the US market.
The minimum investment level is $50,000. The total amount of assets is capped at $20m.
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