Smaller Roth Capital Partners Turns to Private Deals
By RAJIV VYAS
Roth Capital Partners LLC says it has found an oasis in the desert that investment banking has become these days.
The Newport Beach-based investment bank said it raised $54 million in private placements in public companies in the first quarter, according to Chief Executive Byron Roth. That’s on top of $75 million in similar deals in the fourth quarter, he said, after just two deals worth $18 million earlier in 2001.
“For the past two quarters, we did more fundamental private placements in public equity for companies with market values of less than $250 million than anybody else in the country,” Roth boasted. “We did a lot of business in March.”
The deals,in which Roth Capital helps companies find money from private institutional investors rather than doing a follow-on public offering,have helped the firm turn a corner, according to Roth.
After losing money last year, the firm now is profitable and is projected to make money for its fiscal year ending in June, he said.
But Roth Capital, which carved out a niche for itself serving companies overlooked by the big investment banks, still is far from its peak. In 1999, the firm logged nearly $1 billion in deals,mostly initial public offerings,and held its own as smaller investment banks got gobbled up or squeezed out.
To weather investment banking’s downturn, Roth Capital has had to make cuts. The most notable is the shedding of the firm’s retail brokerage operation.
Back in early 2000, Roth Capital counted 200 workers vs. 120 today. About 60 retail brokers and support workers have been cut, while another 20 administration, technology and other positions were trimmed. The firm’s investment banking business has held stable, Roth said, and it still brokers sales for institutional clients and wealthy investors.
“We have gone back to our entrepreneurial roots,” Roth said. The firm has “less managers and more producers, myself being one of those people.”
The firm doesn’t plan to rebuild its retail brokerage when the market picks up, according to Roth. A $16.5 million investment in Roth Capital last year by Salt Lake City-based Zions Bancorporation has helped the firm go without retail operations, he said.
Public offerings,which can be the most profitable part of an investment bank’s business,are another matter. Roth Capital is looking to get back into underwriting and is a co-manager on a secondary offering planned by Austin, Texas-based Multimedia Games Inc.
If Roth Capital starts taking the lead on offerings again, it will be one of only a few underwriters including Goldman Sachs Group Inc. that relies almost exclusively on institutional brokers to distribute shares. Roth said the firm plans to tap institutional investors for as much as 90% of an offering,up from 60% in a typical offering, according to industry sources,and call on other brokerages for retail sales.
As it is now, Roth Capital’s private placements in public companies go entirely to institutional investors, Roth said. The firm already has logged one private placement in the second quarter with hopes for more, he said.
But Roth Capital isn’t alone in chasing private placements for public companies. Other investment banks also are pursuing deals as other areas of their businesses have dried up. Rivals include Los Angeles investment banks The Seidler Cos., Wedbush Morgan Securities and Crowell Weedon & Co., as well as Wells Fargo Securities LLC’s Van Kasper and Irvine-based L.H. Friend, Weinress, Frankson & Presson Inc.
“I would give him credit for (doing three private placements in public equity in the first quarter),” said one Orange County venture capitalist. “But I am not sure how long they could do a PIPE a month.”
Roth contends that while everybody is talking about private placements in public companies, not everybody is doing them. Numbers from San Diego’s DirectPlacement Inc. show Roth with eight deals since October, Van Kapser with two, Wedbush Morgan with one and none for L.H. Friend, Seidler and Crowell Weedon.
But Roth Capital faces a challenge setting itself apart from its rivals in other areas, including mergers and acquisitions work and company research, according to one observer.
“There is no competitive advantage they have,” said an investment banker who left Roth Capital a year or so ago to join a competing bank.
Roth’s other challenge is an ongoing one: the revolving door.
The firm,a small fish in an industry dominated by big names,has seen a steady flow of people in and out for years. Some departures have been high-profile, including that of Walter Cruttenden, co-founder of what is today Roth Capital who left in 1998.
In late March, Dennis McCarthy, who was part of Roth Capital’s mergers and acquisitions team, left to join Seidler. Three others,managing director Brian Mulvaney and analysts Jason Sam and Patrick Winton,also joined Seidler’s Los Angeles office (Seidler has offices in Irvine and Newport Beach).
Others who left include Russ Tolander, head of institutional sales, and Bob London, who was based in Santa Barbara and managed money for himself and clients and left to join L.H. Friend. President Patrick Allen left about a year ago after leaving once before and rejoining the firm.
“It’s a challenge,” Roth said. “You don’t like the disruption of people coming and going.”
Roth, who calls departures common in investing banking, said he has been able to fill every vacancy and that none of those who left were indispensable.
“When things are good in the investment banking world, there is a lot of turnover as firms pay up for talent to meet demand,” Roth said. “Conversely, in a down market, people change careers or change firms looking for a fresh start.”
Allen’s duties have been taken over by Chief Operating Officer Gordon Roth, Byron Roth’s brother. Roth Capital also recently named a new director of research, Gordon McBean, a broker and the firm’s former managing director of corporate executive services.
Before joining Roth Capital, McBean headed up Aliso Viejo-based DigitalOffering Inc., which was bought last year by Spokane, Wash.-based ICM Asset Management Inc. He now oversees Roth Capital’s 12 analysts.
Another hire: Christopher “Kit” Jennings, who left Roth Capital in 1998 to join Friedman, Billings, Ramsey & Co. and later tried his hand at venture capital. He rejoined the firm in February as managing director and head of healthcare banking based in Roth Capital’s Los Angeles office.
“He’s a rainmaker,” Roth said.
Another issue for Roth Capital, as well as other investment banks: keeping up with changing regulations by the National Association of Securities Dealers. Roth Capital was mentioned in a March 27 Wall Street Journal column of actions taken against firms and individuals by NASD Regulation Inc., the regulatory arm of the NASD.
“Roth Capital was fined $25,000, and required to pay $7,367, plus interest, in restitution to customers, without admitting or denying findings that it failed to use reasonable diligence to ascertain the best inter-dealer market, and failed to buy or sell in such market so that the resultant price to its customers was as favorable as possible under prevailing market conditions,” the Journal wrote.
Officials at Roth said the action resulted from an error by a trader in executing transactions. The trades at issue were placed more than two years ago, they said, and the matter was corrected as soon as it was identified.
