Southern California’s Investment Banking Market is Served Mostly by Regional Firms
Southern California is not like many other places in the world. It has 70-degree winters, Disneyland and an investment banking market with deal shops on every corner.
A recent study of investment banking reported there are 350 firms from Santa Barbara to San Diego that handle private placements, mergers and acquisitions, debt offerings and other corporate finance services.
But don’t look for the New York-based heavy hitters. Much of the business is handled by a few medium-size regional firms, such as Roth Capital Partners in Newport Beach, Wedbush Morgan Securities and Seidler Hagerty Stewart in Los Angeles, the Newport Beach operations of J.P. Morgan H & Q; and the Irvine operations of Freidman, Billings & Ramsey Group Inc. Other brokerage firms like L.H. Friend, Weinress, Frankson & Presson LLC and Brookstreet Securities also pitch in to find money for companies.
A tier down from those are the 20- and 30-person shops like Pacific Summit Securities, Global Vantage Ltd. and WestPark Capital Inc. that handle smaller deals on a more local level.
But most of the investment banking and corporate finance firms in Southern California are at the smaller end of the spectrum. There are hundreds of firms with fewer than 10 employees operating across the Southland.
The reason for the number of small firms is that in Southern California there are a lot of smaller deals to be made.
“We have more small businesses in this county per capita,” said Ed Carpenter, chairman of Carpenter & Company, an Irvine investment bank. Carpenter cited a study done recently reporting there are 55,000 businesses in Orange County with more than $1 million in sales.
“This county is fertile for business startups, and there are not a lot of (big) farmers in the delta,” Carpenter said.
The larger firms typically do not handle a deal smaller than $100 million, since they bring in less revenue but require just as much time and research.
“Larger firms will do smaller deals, but typically they focus on the larger deals for obvious reasons,” said Brian Sognefest, an investment banker with Aliso Viejo-based Digital Offering.com, a start-up online investment bank.
In the Southland, the offices of the legacy firms like Merrill Lynch & Co. Inc. and Morgan Stanley Dean Witter & Co. only offer brokerage and advisory services. When a big deal does come their way, the locals usually ship it back to Wall Street or to the San Francisco offices.
“We really haven’t seen an influx of (large) bankers in Orange County. The mainstay has been Roth Capital and a few smaller players,” said Sognefest.
“The firms in Orange County had to be boutique in nature because they weren’t 100-year old firms,” Carpenter said.
The big Wall Street firms never had much interest in anything west of the Mississippi River until the Silicon Valley took off, Carpenter said. When technology firms started popping up, most of the deals were handled in San Francisco. Firms there grew dramatically.
“As California became the vibrant economy, the San Francisco firms did well. The Wedbushes, Seidlers and Crowell Weedons had their day, but they didn’t compare to the San Francisco firms,” Carpenter said.
Meanwhile, smaller players thrived as Southern California companies began taking off. The proliferation of Tech Coast companies needing debt and equity offerings has made the area a handsomely profitable one for corporate financiers.
Today, Southern California is an under-served market when it comes to investment banking and corporate finance, according to many industry veterans.
“There are some huge companies down here. As business develops and the infrastructure develops, it makes sense for those guys to be down there,” Sognefest said.
As the deals get larger, the Wall Street firms may take a second look at Southern California.
“As the economy slows, the big firms are going to look to under-saturated areas like San Diego, Orange County and Los Angeles,” Carpenter said.
Meanwhile, the small shops do not get a lot of publicity, gratitude or criticism, but they do serve a purpose.
Many small companies have no chance at tapping the public equity markets and may not have enough collateral for a bank loan.
“Most of them borrow from themselves, refinance their homes and borrow from friends. And then they hit the wall,” Carpenter said.
Companies then have to convince professional investors or institutions that their businesses are worthy. The smaller shops work with businesses to refine their business models and find them funding.
Some of the smaller shops are getting into risky waters. The Securities and Exchange Commission is trying to clamp down on the deal makers that are not licensed with the National Association of Securities Dealers Inc. to take commissions on private placements or M & A; deals. To collect a commission on a deal, a firm must have a broker-dealer license from the NASD. The unlicensed deal shops get away with it by calling the fees they charge finder’s fees or advisory service charges.
“Most securities lawyers say you are treading on risky ground,” said Geoffrey Chalmers, a securities lawyer with a solo practice in Boston. The SEC has been policing the industry for these nonlicensed deal makers but has stepped up its efforts lately as more companies are looking for intermediary help.
“They (the SEC) would love to nail someone like that and hang him up there for everyone to see,” Chalmers said. n
