Dissecting the Private Markets

Dealflow  |

We tracked 2,307 launched financings during the fourth quarter of 2014. Note that these were open, active raises at the time when we did our monthly data collections. We do not track closed financings or those of indeterminate amount.

Rule 506(b) offerings once again generated the most deals, with 74% of the total. Rule 506(c) offerings accounted for 7% of the deals, up from 6% in Q2 and Q3.

Portals hosted 16% of the offerings, down from 21% in Q3. The moderate decline may reflect some slowing in an initial stampede to list financings on funding portals.

Less than ten appeared on LinkedIn or in media sources. Large numbers of solicitations appear on LinkedIn, but most of them did not meet Dealflow’s selection criteria, and many of the principals simply do not respond to inquiries.

Dealflow was the source for about 70 financings. Some of these were discovered through research and outreach, while in other cases the issuers contacted us directly.

In  aggregate  dollars  sought  in  open,  active  raises  in  Q3,  Rule  506(b)  offerings represented the largest portion of the total, or 73%. These offerings were seeking over $11.5 billion. Some $2.4 billion in Rule 506(c) offerings represented 16% of the dollars sought. These figures represented a moderate rebalancing from the previous quarter when the percentages were 80% and 10% respectively.

Portals represented 6% of the total, while Dealflow made up 2% of the total with financings seeking a total of about $350 million.

The fourth quarter showed a tendency towards larger deal sizes compared with the previous quarter. The average deal size was about $6.7 million. Offerings made through regulatory filings averaged about $7.47 million, while those from portals and all other sources averaged $3.35 million. Offering sizes ranged from a few thousand dollars to $500 million for an offering from Funding Circle Notes Program.

In Q4, the largest share of offerings, or 40%, fell into the $1 million to sub $5 million range – up from 36% in Q3. At the same time, there were fewer raises in the smallest category – under $5 million. In Q4 these raises made up 15% of the total, versus 20% in Q3. The $10 million to under $50 million range saw an uptick from 12% in Q3 to 15% in Q4. In both quarters, offerings of $50 million or more represented 2% of the total.

In offering structure, equity again accounted for the majority of offerings or 68%, up from 64% in Q3. Convertible debt remains a popular option, and startups continue to be creative in devising hybrid financial structures.

As is usual in the overall universe of offerings, the information technology sector accounted for the largest share – over 650 deals that accounted for 29% of the total. The next largest contributors were healthcare and real estate, each with about half as many offerings. Consumer discretionary made up 14% of the total, followed by financials with 9%. The remaining sectors each made up 5% or less of the total.

In aggregate dollars, over $3.6 billion in real estate offerings made up 24% of the total. Real estate has been showing increasing activity across all deal sources, and real estate funding portals are rapidly becoming more popular though as yet they account for a small fraction of the broader real estate market.

Five offerings of $125 million or more accounted for most of the quarters offerings in the over $50 million range. These included a $250 million offering from 30 Park Place EB-5 Lenders, which is tapping multiple capital sources to construct a billion dollar building in Lower Manhattan. The federal EB-5 program allows foreign investors to obtain citizenship in exchange for lending to borrowers in the U.S. Cottonwood Residential and Vital Farmland REIT also raised $250 million.

Online platforms Carlton Accredited Equity and Prodigy Network were responsible for offerings over $40 million, each of which provided one part of a larger capital structure. Other transactions were as low as around $60,000. Many offerings closed in a matter of days and even hours and thus were not captured in Dealflow’s monthly open deal data reporting since they were no longer open to investors.

Information technology accounted for the second largest dollar value in open deals, which amounted to over $3 billion during the quarter. Mobile payment specialist Mozido was looking to raise $400 million, and got nearly half way there in a $185 million October Series B round with backers including MasterCard and Tiger Management Corp. NantMobile was raising $100 million, and South Korean gaming and Internet provider Daum Kakao launched its own payment system as it began raising $90 million to invest in other Internet and social media companies.

The information technology sector continued to offer diversity in the size of capital raises, which came from the youngest startups to established late-stage companies. Deals ranged from Mozido’s to a company raising about $5,000, and the average was about $4.5 million. About one-quarter of the deals sought $500,000 or less. About 75% of the raises were disclosed in regulatory filings, averaging around $5.3 million. The remaining were offered on portals or other media, and these deals averaged $2.6 million.

Healthcare accounted for 16% of the capital sought. Pacific Proton Therapy Regional Center and NantBioscience were both raising $100 million. NantWorks subsidiary NantBioscience develops cancer treatments. Pacific Proton is building a center for proton cancer therapy, which offers advantages over some traditional treatments but requires massive and costly infrastructure.

The financials sector made up 14% of the funds sought in the quarter, with offerings averaging over $12 million. Two offerings pushed the average up: deals of $500 million from Funding Circle Notes Program and $350 million from GreenSky Trade Credit. GreenSky is a consumer and home improvement lender. During the quarter PE firm TPG paid $150 million for an interest that valued the company at almost $2 billion. Funding Circle, which recently entered into an partnership with RBS, is a peer-to-peer lender active in the U.S. and the U.K.

The other sectors represented 8% or less of the total dollars sought.

Information technology had by far the largest number of offerings in the group of deals marketed through portals or other media. Its 41% of the total reflects the value of non- traditional capital raising to seed and early stage companies. Consumer discretionary companies were next with 16%, followed by healthcare and consumer staples with 10% each. Financials represented 8% of the total, and the remaining sectors each accounted for 6% or less of the total.

The average deal size here was about $3.3 million, a number that reflects some real estate offerings in the $40 million range. Information technology also accounted for the largest portion of the capital sought, or 32%. This sector’s offerings averaged about $2.54 million. The $90 million Daum Kakao offering skewed the tech average up. Without this deal, the average would have barely hit $2 million. Some 40% of the offerings sought $500,000 or less. Mobile app and E-commerce continued to flourish, as did virtual currency startups like Volabit and Bitreserve. (Early this year Coinbase raised $75 million in what may be the biggest virtual currency round yet, giving the company a valuation in the neighborhood of $400 million.)

Real estate financings seeking over $300 million accounted for almost a quarter of the capital sought. Several large Manhattan-based projects seeking $40 million or more drove this number. The offerings were just one part of a capital stack, usually involving bank debt, equity, mezzanine debt and sometimes other debt as well.

Financials accounted for 15% of the total, with deals including a single $80 million raise, and consumer discretionary offerings seeking about $150 million gave that sector 11% of the total. Healthcare made up only 6% of the capital sought, versus 16% of all the deals. Healthcare companies continue to favor traditional Rule 506(b) placements to raise capital.

Rule 506(c) filings seeking over $2 billion made up about 8.5% of the quarter’s Form D filings, up from about 7.6% in Q3. Acceptance of the new placement and its potential advertising will likely grow more quickly once regulators clarify some outstanding issues about how and when the filings must be made and managed. (Rule 506(c) filings for funds represented a much greater dollar figure, but most are not using general solicitation in an obvious way.)

In total number of Rule 506(c) offerings, financials led the way with 19%, followed closely by consumer discretionary with 17%, information technology with 16% and energy with 14%. Healthcare issuers, representing 11%, were not seemingly enthusiastic about this type of offering, and real estate accounted for only 10%. The remaining sectors each accounted for 7% or less of the total.

In aggregate dollars sought, financials and real estate together accounted for 71% of the total, with a few large offerings boosting both totals. Financials were seeking over $1 billion, representing 46% of the total. A major component in the financials number was the $500 million raise from peer-to-peer lender Funding Circle. GreenSky TradeCredit’s $350 million offering also came in the form of a Rule 506(c) filing.

Over $600 million in real estate deals gave the sector one-quarter of the total. Here again two large offerings made up most of the total: $250 million offerings from 30 Park Place EB-5 Lenders and Vital Farmland REIT. None of the other deals exceeded $20 million.

The remaining sectors accounted for 8% of the total dollars sought.


Dealflow Platform Launches: Accredited investors can now search thousands of active financings on the platform. Listings include new and active capital raises aggregated from a variety of sources, including regulatory filings, funding portals, company websites and social media.

Deal Data: Traditional Rule 506(b) filings continue to account for most of the offerings, but Rule 506(c) offerings made incremental gains quarter over quarter. Portals continue to do brisk business, and more are emerging – especially in real estate.

Rule 506(c): Issuers are still not rushing to use this new form of sourcing investors, but they will grow more accustomed to the option as time passes, especially if the SEC makes some decisions on a few unsettled regulatory issues.

Accredited Investor Verification: A lot could ride on changes to the definition to accredited investor status. Some proposals could reduce the pool of such investors, while others could have the opposite effect. It is unclear how many years the Commission will take to change the definition – if it does so at all. It also remains unclear when the regulators will finalize Title III crowdfunding rules or tighten up remaining areas of uncertainty for Rule 506(c) offerings.

State Options: More states are becoming impatient with the SEC’s lengthy rulemaking process. State options are limited to investors within a given state, but such options may feature low investment minimums and allow investment by non-accredited investors.

Enforcement and the JOBS Act: FINRA is concerned with problems stemming from general solicitation, and at least one portal has recently run afoul of the SEC for not attempting to verify investors’ accredited status.

Editor's Note: Changing Accredited Investor Definitions is an excerpt from Dealflow.com's whitepaper, ONLINE DEAL MARKETING OUTLOOK FOR Q1 2015 Investors and Issuers Chafe as Regulators Dally; States Offer New Alternatives; General Solicitation under Surveillance. For more information, visit Dealflow.com.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer



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