Minnows gripped by credit squeeze in wake of crisis

Jun 13 2010 - Glenda Korporaal, The Australian

AUSTRALIA'S small listed companies are still struggling to raise finance in the wake of the global financial crisis, according to fund manager Roger Sharp.

"The liquidity squeeze is still very much alive and well," Mr Sharp said.

"Anybody who says the banking crisis is over doesn't understand how tight the market is and how hard it in for small companies, even listed companies, to raise debt.

"Every week we see small companies looking for debt or equity who are being knocked back."

Companies that succeed in securing a loan can pay 6 per cent and more above cash rates, according to Reserve Bank statistics.

Mr Sharp, a former senior executive with ABN Amro, founded fund manager Co-Investor in 2004 with the support of the Victor Smorgon Group and other wealthy family offices to invest in small listed companies in Australia and New Zealand with market capitalisations of less than $200 million.

After raising an initial $17.5m for its first fund, it successfully invested and sold off New Zealand listed dental software company Software of Excellence to NASDAQ-listed Fortune 500 company Henry Shein in 2007, and Australian online travel business travel.com to Wotif.com Holdings in 2008.

The Victor Smorgon Group has a 25 per cent stake in the management company, which runs three funds for 51 family offices and high net worth investors. Investable funds are approaching $100m.

The group's strategy is to buy a holding in a small, listed company and provide financial support and management guidance with a view to an eventual sale or other exit.

Current holdings include a 68 per cent stake in mobile telecommunications provider Comtel, and ownership of the de-listed advertising and communications company D2 Marketing, once known as CommQuest and famous for paying socialite Paris Hilton thousands of dollars to attend a New Year's Eve party.

Mr Sharp said many small listed companies on the ASX had seen the value of their equity plunge in the sharemarket fall, and were having trouble refinancing their debt.

Investors were still wary of putting in new equity and banks much warier about lending to the small cap end of the market.

"There are a generation of zombie companies in small cap land that have massive amounts of debt," Mr Sharp said.

"They have way too much debt, relative to their market capitalisation, and it is a very difficult situation to resolve."

Mr Sharp said the big banks were "picking and choosing" the companies they lent to.

"They are either charging huge margins or they are not there at all," he said.

"Every day we see an instance of a good small cap trying to do something but they cannot raise the debt."

The New Zealand-born Mr Sharp worked in California in the eighties after obtaining a law degree from the University of Auckland.

He established a credit reference business in New Zealand called Data Corp, which he sold in February 1987, before the stockmarket crash of October that year.

He moved to Australia, where he worked for stockbrokers Ord Minnett before joining international investment bank ABN Amro.

After a stint in Hong Kong as head of Asia Pacific equities for ABN Amro, he moved to London in 2000 where he was global head of its technology business.

He left London after the dotcom crash of 2001, returning with his family to live in Sydney.

After the expiration of a three-year non-compete agreement, he decided to set up a fund focusing on the small cap end of the market, raising financial backing from wealthy families including Melbourne's Smorgon family.

One of the group's investment success stories is travel.com, the online travel agency which listed in 1999 at the top of the dotcom boom at $1.25 a share.

Its share price soared to almost $3 on the first day of trading but the company struggled and its shares plunged to as low as 8c.

Co-Investor bought a 25 per cent stake for an average of 16c a share in 2004 and helped restructure the company and seek a buyer. It eventually sold the company in January 2008 after a takeover battle between two online travel companies with the company eventually going to Wotif.com, getting out for about 50c a share. Mr Sharp says the Co-Investor group looks at about 100 small cap companies as potential investments each year.

Specifically excluded are companies in resources, property and bio-tech.

Mr Sharp said his fund looked for businesses that had positive cashflows.