New York (Opalesque ) – Is it possible to be both obscure and famous at the same time? Certainly anyone who manages a PIPE fund might say so. Private investments into public equity (PIPE) funds regularly face an uphill battle educating investors. The term PIPE fund has grown more widely recognizable by its recent association with investigations and scandals.
This perception, along with the global financial crisis, have taken their toll on PIPE funds and made what was always a small space even smaller. But the remaining funds – ones with track records of performance and transparency – have benefitted from the shrinking space. With the demand for PIPE financing undiminished and growing, the remaining funds have more opportunities than ever to make quality investments.
Investors recognize that PIPEs are an efficient way to finance publicly traded companies. Warren Buffet did a PIPE to acquire his investment in Goldman Sachs and the U.S. Government did a PIPE to acquire its position in Citi Bank.
Bruce Bernstein, who runs Rockmore Capital, a New York-based PIPE fund, focuses on investments in small cap companies. “There isn’t a great deal of positive media coverage on our strategy, but there are many positive unreported results that we facilitate, such as funding for new products in the Life Sciences sector, specifically biotechnology,” Bernstein said.
Bernstein and Partner Brian Daly have managed Rockmore since April 2006. Prior to Rockmore, Bernstein managed a fund with an identical strategy at Omicron Capital from 2001 through 2006. Over the past few years Bernstein has watched much of the competition exit the markets, just as the credit crisis began to steer bigger and better quality companies into alternative financing.
“There are far fewer players in our space then there were three years ago; poor investments, illiquidity and redemptions played a vital role in this,” Bernstein said. Like other funds across all strategies that offer liquidity to their investors, Rockmore incurred investor redemptions during the height of the liquidity crisis – even as the firm’s performance outpaced hedge fund indexes. With only a single down year on record, Bernstein has delivered steady, annualized net returns of 9.02% since beginning the strategy in 2001. In 2008 Rockmore protected capital, notching a loss of only 7.60% when the S&P 500, Russell 3000, and Dow 30 all lost at least 33%.
Rockmore’s ability to provide investors with full transparency was crucial in minimizing redemptions during the crisis, Daly said. “The fund has developed a proprietary back office risk and trading system that provides real-time NAVs and gives our investors full transparency. Providing mid-day NAV’s and allowing our investors to monitor the portfolio while still executing our strategy of hedging gave our investors comfort during a volatile market.”
Currently in asset-raising mode, Rockmore’s biggest hurdle may be helping investors realize where PIPE funds can fit in their portfolio.
“Small cap investing typically falls into the alternative asset allocation class for most institutional investors, so PIPE funds must compete for a smaller pool of capital,” Daly said.
Nevertheless, Bernstein said, investors recognize the potential for growth in the small cap space. “These are ‘orphaned companies’ – too big for local banks to finance but too small to be covered by traditional investment banking firms. There’s a population of more than 3,000 companies that need financing. They’re beyond the venture capital stage, but they still need that additional $10 million or so to get to that next stage.”
“Our strategy is a great way to play the small cap space, as we eliminate a lot of the volatility associated with small caps by hedging,” Daly added.
The profile of companies that Rockmore invests in has changed as well. “We’ve always been sector agnostic, but historically 80% of our investments have been in biotech and life sciences,” Bernstein said. “That number is now only about 20%.”
Bernstein attributes the recent growth of PIPE financing to the aftermath of the financial crisis. “Due to events in the financial markets over the past few years, traditional financing sources dried up. We’ve seen bigger, better and more diverse companies come into our market. We have commodity based companies, high tech and low tech, energy – all kinds.” (A gun manufacturer and a tobacco company are among Rockmore’s largest investments.)
Even so, Bernstein said, in the small cap space, sector correlation is not necessarily high risk. “The majority of the companies we invest in are event driven and not necessarily correlated with the markets – or even with their own sector – because each has its own unique event which proves to be a driving force in future price movements.”
