Investors Get Jump on IPO Rush With Private Funding.

FOR high-net-worth individuals, the action has shifted from Wall Street to, well, let's call it "Off Wall Street."

Many rich investors got that way by being well read and shrewd.

Last year and early this year, they saw the enormous first-day runups in initial public offering prices during the Internet boom. However, many rich individuals were shut out of such offerings, due to huge institutional buyers bellying up to the bar first and buying the whole IPO.

Now, those rich folks have figured out an end-run: Buy the stock before the company goes public, said Rick Rappaport, investment banker and CEO with WestPark Capital Inc., a boutique brokerage in Century City.

"We have been doing a lot of private placements (private equity, not registered with the Securities and Exchange Commission) of small and micro-cap companies, and the reception among individual investors has been very strong," said Rappaport. "We have been doing about one deal every month."

As a boutique, WestPark typically handles deals in the $1 million to $15 million range, with an emphasis on biotech, telecom and Internet infrastructure investments.

By the way, with an aging population of baby boomers who will need increasing amounts of medical attention, and the tendency of investors to "invest in products they have seen or touched or are affected by," Rappaport believes there is a huge future in selling biotech private placements.

"Not only will (baby boomers) have the money, they will be seeing medical products and services for themselves," he said.

And just as a happy shopper at Home Depot Inc. might buy the stock, so a patient with a successful treatment outcome might decide the medical products or services involved are worth investing in.

The future for private placements in biotech, telecom and other industries is so bright that -- like several other financial outfits in Southern California, most notably Santa Monica-based Direct Stock Market Inc. (dsm.com) -- Rappaport's WestPark Capital plans to "retail" private placements online, both domestically and overseas.

"We have found there is a huge demand overseas for private offerings in small-cap and private companies," said Rappaport. "The online presence will allow those people to view our offerings and get in."

Recently, Rappaport successfully placed a $1 million short-term loan with an equity kicker for a company that has developed a "transdermal delivery system," which is a lotion that penetrates the skin to deliver a drug.

"When our investors used the drug, they invested right away," said Rappaport. (The investors used an over-the-counter version of the drug for fighting athlete's foot.)

Rappaport is working on a $15 million equity private placement for the company, as well.

Lenders Tightening

The economy is strong and has been for years. Interest rates are relatively low (well, at least for those who remember double-digit inflation), so mid-sized companies ought to be able to line up business credit, right?

Actually, banks are getting tight, and more and more "asset-based lenders," such as Phoenix-based Finova Capital Corp., have exited the business, says Larry Hurwitz, founder of Brentwood-based Lawrence Financial Group Inc.

"I have seen this cycle before. Too much credit gets extended in good times, some of it crushes, and then lenders tighten up," he said.

But fear not, said Hurwitz. He has become the exclusive West Coast agent for Chicago-based Hilco Capital Partners LP, which has $120 million burning a hole in its pocket. It's relying on Hurwitz to extend loans in the $1 million to $10 million range, usually secured by assets, receivables or royalty payments.

Hurwitz is working on a deal to extend $10 million to a film company, secured by the moviemaker's film library, which was assessed at $100 million.

"But banks have gotten touchy, and they would only lend $30 million on the library. We lent the next $10 million," he said.

Lenders do have to pay the piper -- Hilco charges "prime rate plus four or five," which means about 14 percent at today's rates.

Employee-Based Fund

New York-based Donaldson, Lufkin & Jenrette Securities Corp. announced it is raising $150 million from its own employees for a new venture capital fund. And word is that much of the dough is coming from Century City, where DLJ keeps 125 investment bankers under Ken Moelis, head of corporate finance worldwide for DLJ.

Under Moelis' direction, in the last two years the Century City office has completely revamped its focus, from traditional investment banking and junk bond financing, to its current model of heavy emphasis on tech-telecom venture banking, often within a 100-mile radius of its office.

No one is talking about percentages, but one source said that as much as half of the employee money for the new fund appears to be coming from Century City.

More From Orlanski

The peripatetic and veteran securities lawyer Leib Orlanski, and his outfit, the Beverly Hills branch of national firm Kirkpatrick & Lockhart LLP, showed up in a couple recent stock offerings.

In the first deal, Orlanski's shop handled the legal side on a $15.7 million secondary common stock issue for Vitech Inc., a Miami-based maker of computer products, peripherals and software primarily sold in Brazil.

And in mid-July, Orlanski's firm also handled the $340 million initial public offering of Beverly, Mass.-based Axcelis Inc., a leading manufacturer of ion implantation equipment, which is used in the fabrication of semiconductors.

Kirkpatrick & Lockhart provided legal counsel to Goldman, Sachs & Co., the lead underwriter on that deal.

Quick Takes

There were a couple notable initial public offerings last week, including a whopping $759 million IPO by Santa Monica-based Entravision Inc., a media company which targets the domestic Hispanic market, and a $79.5 million underwriting for Los Angeles-based California Pizza Kitchen Inc., the restaurant chain. On the Entravision offering, the Century City offices of Donaldson, Lufkin & Jenrette was the lead underwriter.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal.