Is the Ice Thawing in Capital Markets?

It sure looks that way, and both small-fry and giants are collecting. It's one more hopeful sign of an economic recovery .

To David Steinberg, it seemed like Christmas in June. The CEO of InPhonic, a Washington (D.C.) builder of online wireless portals, set out to raise $10 million in venture capital. Instead, Silicon Valley-based Technology Crossover Ventures (TCV ) insisted on giving him $56 million, so sold was the firm on InPhonic's business model. "We choked a little when they told us how much they wanted to put in," says Steinberg -- especially since the VC markets have been frozen since 2001. 

Steinberg isn't alone in his good fortune. Over the past month, big companies such as General Motors (GM ), telecom-equipment supplier Lucent Technologies (LU ), and copier giant Xerox (XRX ) also have issued new debt and stock -- and they ended up raising 7% to 16% more money than they anticipated.

Are the capital markets coming back? While hard figures won't be available for several months, plenty of other hopeful signs say yes. One indicator: The difference in interest charged on corporate vs. government bonds has declined from 3.75% in late 2002 to 2.8% recently. That's close to where it was 1999 and 2000, back when VC money and other capital flowed like milk and honey.

CASH IN WAITING?  Clearly, investors see private stocks and bonds as less risky, says James Glen, an economist at think tank Economy.com. Then, there's the recent rally in the stock market, which seems to be reviving investor interest. "We've turned the corner," sighs Donald Luskin, chief investment officer for economic consultancy TrendMacrolytics. "The nightmare is over."

Plenty of pent-up money may be available, too. Over the past five years, private equity funds raised $310 billion -- but they have invested only $192 billion of it, according to the National Venture Capital Assn. Much of the remaining $118 billion has been parked in low-interest government bills. Now, it could be gradually reinvested into the private sector.

A flood of venture capital would be good news for companies that have taken on huge debt loads in hard times for such things as pension liabilities. And at the smaller end, startups need fresh cash infusions to make ends meet. It could also help fuel industry consolidation -- many experts see an acceleration of mergers and acquisitions in 2003's second half.

RECORD-BREAKING FLOAT.  While the rising capital tide could boost all boats, technology companies may be the biggest winners. Many of the surviving funds now looking to invest were created in 1999 to focus on technology, back when it was hot. They stick with what they know, says David Lavallee, co-founder of Revolution Partners, a Boston-based boutique investment bank. Plus, after the dot-com bust, the sector is perceived as riskier -- and, consequently, as offering potentially higher returns.

Companies looking to recapitalize could also benefit greatly. Take GM: The world's largest auto maker is considered a solid investment, says Lavallee. On June 26, GM and its financing unit, General Motors Acceptance Corp. (GMAC ), issued $17.6 billion worth of bonds, making it the largest corporate debt offering ever and allowing GM to reduce its pension liabilities.

Investors also reward companies for their progress in stemming losses. On June 25, Xerox raised $3.6 billion -- $500 million more than its goal -- through common stock, convertible securities, bonds, and bank financing (see BW Online, 7/16/03, "That Heartbeat You Hear Is Xerox"). "The opportunity was appropriate to the significant progress [Xerox] has made in strengthening its business," says a company spokesperson. "Investors were and continue to take notice."

"WONDERFUL TIME."  Optimism begets optimism: Reza Samahin, co-manager of the Altamira Science & Technology and E-business funds, says he thinks Lucent Technologies became a more stable investment on June 9, when it announced that it had raised $1.63 billion in debt to cover upcoming liabilities.

More investors are also interested in startups -- which could lead to a resurgence in IPOs if the market recovery continues. Overvaluations of many private companies have been squeezed out by three years of a bear market and lean economic times. Plus, the risk has diminished: The startups still standing have proven their mettle, says Jake Reynolds, a partner at TCV, which funded InPhonic. Most of them now need money for acquisitions or to gain market share.

TCV, which manages $2.5 billion in funds, is looking to increase capital outlays in the second half of 2003, Reynolds says, adding, "We think it's a wonderful time to invest." Revolution Partners' Lavallee says he has his eye on privately held Google, the search-engine company that has come under new pressure to go public now that Yahoo! (YHOO ) has announced that it's buying Overture Services (OVER ) (see BW Online, 7/15/03, "Why Google Should be Worried").

Still, the fact that the capital markets have opened up won't solve all of the problems of those receiving the money. "You can recapitalize all day long and not have any cash," says Michael Kinsman, finance professor at Pepperdine University in Malibu, Calif. But in comparison to the past few years, it looks like springtime for the capital markets. Can recovery be far behind?

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