1986, 1998, 2001, 2008, 2020….
The last four decades have been defined by major market events that were “game changers” for the global economy: the beginning of the savings and loan crisis, the dot-com bubble burst, the global financial crisis, and now the Covid-19 pandemic.
With each stress they faced, the companies that moved decisively to evaluate their balance sheets and preserve and/or raise capital emerged even stronger, while those that did not often had to be restructured or liquidated.
Since I started in the banking industry at Salomon Brothers in 1992, I have adhered to the concept that balance sheet management and financings are strategic. In other words, the decisions companies and their boards make relative to their capital structure and financial risk can be just as critical as those relative to business mix.
In less volatile periods, financing choices may not seem particularly strategic, giving rise to thinking such as:
- If debt is abundant and cheap, why not continuously keep adding leverage?
- Is it really worth adding a world-renowned equity investor to the cap table if the investor requires a discounted entry price?
- Why should a private company ever go public since capital has become so abundant in the private markets?
- Why should we pay a premium to term out debt? Isn’t it cheaper to fund the balance sheet on the short end?
In good times, such questions, and many others, are often considered mundane and decided in a tactical manner. However, when the economy weakens considerably, as it has during the pandemic, everything changes. All else being constant, access to cash and the disposition of the company’s lenders and shareholders will define the trajectory of an enterprise during and after a crisis.
Since the onset of Covid-19, the discussions we have with clients display a proper sense of urgency and risk management:
- Will the banks work with us and provide forbearance? What happens if a significant portion of our lenders are alternative asset managers rather than banks?
- Can we negotiate a deal with direct lenders to refinance our near-term debt maturities?
- Will our VC provide us with more capital, even in a down round?
- If our stock is down 25% from its highs, should we do an equity deal? Will that be viewed by the market as strength or weakness? (Although the S&P 500 has rebounded significantly since the onset of the crisis, the majority of public company shares are in negative territory for the year).
- Is there a negative impact if we draw on our revolvers and/or eliminate our dividend and take other cashflow management steps?
- Our strategy relies on continued funding until the company is cashflow generating but the market has become more discerning…what are our alternatives?
- As a private company, should we consider selling to a special purpose acquisition company (SPAC) as an alternative to an IPO? Will this get us to market sooner and avoid timing risk?
These questions have nothing to do with business mix and certainly are not about traditional M&A. Instead, they are about sources of capital—the most strategic issue facing so many companies today. For example, many technology and tech-enabled companies are benefiting from new consumer and corporate behaviors that increase their prospects and, in turn, their value. Yet they, too face challenges such as how best to take advantage of the changed landscape. Many are accelerating fundraising by months if not years. Those that were planning IPOs over the next several years are selling to SPACs to take advantage of rules permitting company-derived forward projections and other flexibility.
As an advisor to companies and their boards for more than 100 years, Cowen embraces its mission “to advise and connect users and sources of capital to help them outperform.” We are in the solutions business, recognizing that no two situations are the same. Unlike a pure M&A boutique, Cowen is structured to provide truly independent advice across an array of alternatives—especially important during a crisis such as the global pandemic.
Through our strength and leadership in equity and credit markets, we deliver unique insights and the best possible advice to companies, private equity firms, venture capitalists, and family offices about capitalization and financing—in addition to our world-class M&A advice.
At Cowen, we are constantly striving to expand our position as a leading middle market investment bank by adding resources that can help us deliver truly product agnostic solutions to clients. This was a driving force in our decision to acquire MHT Partners, L.P., based in Dallas and San Francisco. The combination of MHT, our Quarton acquisition in early 2019, and strategic hiring we have made over the last few years strengthens our position as the advisor of choice to middle market and growth companies.
We listen to clients as we help them navigate the very choppy waters of the most volatile market in over a decade. We are humbled by the momentum we have with clients as demonstrated by our results to date.
Whatever the future holds, Cowen will be here to advise and guide clients, based on our hard-earned experience of the past—and our expertise in the ever-changing markets of the present and future.
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