Lending competition gets stiffer as money grows more plentiful.

It seems like capital is growing on trees.

Only two years ago, many successful, mid-sized companies were having a tough time finding money for expansion.

Today, "banks are falling all over each other to lend money. Bankers are cold-calling clients," said Gary Seehoff, managing director of Duitch Franklin & Co., a Brentwood accounting firm.

And bankers aren't the only ones chasing his clients these days.

"I probably get four or five calls a month from investment bankers looking for introductions," to his client base of firms with annual revenues of $3 million to $30 million.

Investors are lining up to buy a minority stake in a private company or buy up stock in an initial public offering, according to local investment bankers.

Meanwhile, Southern California banks have never been so well capitalized and never so aggressive in trying to make loans to growing companies, banking experts said.

In 1996, California banks have $30 billion in capital to back up loans, according to Veribanc Inc., a Wakefield, Mass.-based bank rating agency. That's an increase of 35.7 percent over 1991, when banks had just $22.1 billion in capital.

More impressive is the growth in equity investment funds - both IPO money and venture capital.

In the first six months of this year, 422 companies went public, raising $27.2 billion, according to "Investment Dealers Digest," a New York-based newsletter.

That compares with 219 IPOs in the first six months of 1995, which raised $10.7 billion.

Private equity is growing at an even faster rate, according to "Buyouts," a New York-based investment trade publication. In the first six months of 1996, $10.6 billion was invested through the purchase of equity in private companies, according to Buyouts.

That is almost as much private equity raised as in the two full years of 1992 and 1993, when there was $11.6 million invested in private equity funds.

"If you are an emerging business in Southern California looking to raise capital, now is the time," said Peter Griffith, managing director of Wedbush Morgan Securities in L.A.

Even when compared to the go-go '80s, "I think this is the best," the capital market has ever been, Griffith said.

Chris Kanoff, director of investment banking at L.A.-based Jeffries Group Inc., said that the cost of raising capital through public markets is lower now that a few years ago.

Additionally, company owners "are giving up a smaller percentage of their companies to get capital," Kanoff said. And the valuation for companies is higher than it was a few years ago.

"You see a lot of $10 million to $25 million equity deals being done today," Kanoff said. "What that says is that investors are willing to invest in much smaller companies."

Lloyd Greif, president of L.A. investment banking firm Greif & Co., said money is being raised faster today than it was a couple of years ago.

Year over year "our business is up three-fold," said Greif, who has taken a number of local companies public in recent years, including Mrs. Gooch's, L.A. Gear, and Smart and Final.

Although there have been a lot of good IPO deals done recently, when the market is "nova hot, there are some transactions which shouldn't have been completed," he said.

Greif wouldn't mention names, but he noted that there have been some recent offerings of companies that aren't even operating in the black. These companies that went public "aren't of the maturity level that they belong in some grandmother's portfolio," he said.

But the hottest transactions these days, he said, are not so much IPOs, but private placements. Investors are looking for small companies, with revenues in the $5 million to $50 million dollar range, that need money to launch a product line or expand facilities.

These investors are putting money into a small company hoping that the business will go public or will be sold in three to seven years, he said. It's the riskiest type of investment, but also the most profitable, he said.

These investors are looking for a 30 percent to 40 percent annual return on investment, he said.

Michael Rosenberg, managing director of Brentwood investment banking firm Barrington Associates, said the company recently completed a $50 million recapitalization of a private company.

"We had nine different investment groups providing money for this company - a situation that was unheard of five years ago," he said.

In the past, Rosenberg said, a lot of the capital for equity investments in small private companies was supplied by savvy, individual investors. But these days the money is pouring in from big institutional investors, such as mutual fund managers.

California banks' capital grows(*)

1996                     $30.0
1995                     $28.6
1994                     $27.8
1993                     $26.9
1992                     $22.4
1991                     $22.1

* Figures are in billions, as of March 31 each year

Source: Veribanc Inc.

Nationwide, the amount of money invested in mutual funds has tripled from $1.066 trillion in 1990 to $3.184 trillion in 1996, said Debra McGinty-Poteet, director of investment funds for Bank of America.

"Ten years ago, there were probably less that 15 million (people) holding mutual funds," she said. "Today, there are about 131 mutual fund shareholder accounts."

The funding is likely to continue to be a stable source, McGinty-Poteet said, noting that more and more people are choosing mutual funds in 401K retirement plans.

"They just set it up in the office and forget about it," she said. "And the money just pours in."

Frank Pekny, vice chairman and chief financial officer at City National Bank, said "there is no question" that the bank is finding increased competition from investment bankers.

But still, "we think our biggest source of competition on the loan side is from other banks our size and bigger," he said.

Competition for loans and business customers is fierce these days, Pekny said. A number of local banks are working to pick up business customers from the former L.A.-based First Interstate Bancorp. That L.A. bank merged with San Francisco-based Wells Fargo & Co, earlier this year.

And a lot of local banks have a lot of money to lend out, including City National, Pekny said. "The amount of capital we have today is the highest level of capital that the institution has ever had," he said.

Charlotte Chamberlain, bank analyst with Wedbush Morgan Securities, noted that a number of local banks have as much as 50 percent more capital than is needed to be considered "well capitalized" by federal standards.

"Banks are swimming in capital," she said.

Banks with excess capital essentially have three options: buy back stock, acquire other institutions, or use the money to grow by making more loans.

Because of the recession of the early 1990s, banks still have "discipline about who they are going to lend to," Chamberlain said. Right now, "there are too many banks chasing too few good loans," she said.

Larry Layne, director of relationship banking at Sanwa Bank California, said that as a result of excess capital, "a lot of banks are chasing assets awfully hard."

Other major banks, in recent months "are getting very aggressive" on loan pricing and on credit quality standards, Layne said.

Seehoff said companies that want to get loans still should have "sensible fundamentals" - a recent positive earnings history and underlying assets to collateralize the loan.

"Banks aren't just making loans stupidly," he said. But lenders these days are willing to forgive things that would nix a loan in the past, such as a year or two of net losses.

Seehoff said he knows that "the banking industry goes through cycles" and eventually the purse strings will tighten.

But for the foreseeable future, "I see it getting more competitive," he said.