Multiple Choice

Flooded with money, capital markets could present CFOs with many answers to the perpetual question of where to get cash.

Calistoga Pharmaceuticals has a new drug for cancer and inflammatory diseases that is currently in Phase 2 clinical testing, but the company’s $96 million in venture capital won’t last through the registration and commercialization processes.

Fortunately for Calistoga, finding more cash will be anything but a trial. The company can tap private equity again, borrow from a commercial bank or nonbank lender, or even partner with a large biotech company. “Whether we [raise capital] in one shot in 2011 or [in stages] will be determined by the state of the overall markets,” says CFO Andrew Guggenhime. In any event, Calistoga will have its pick of options.

Welcome back to the luxury of choice. Low interest rates, investment-capital overhangs, and hunger for yield mean many CFOs will enter 2011 with a surfeit of capital-raising opportunities. Capital markets have recovered remarkably since the recession. Debt, for example, is dirt cheap. Wal-Mart’s sale of three- and five-year bonds last October garnered the lowest-recorded coupon for U.S. investment-grade since 1970. “This is kind of a historic time; what a great time to be a borrower,” says Varun Bedi, a principal at Tenex Capital Management. “The average A-grade, 20-year bond is at rates we haven’t seen since the 1960s.”

Not to be outdone, equity markets have also rolled out the red carpet. Global volume of initial public offerings totaled $147 billion in the first three quarters of this year, the strongest nine months for IPOs since 2007, according to Thomson Reuters. On a smaller scale, private investments in public equity have picked up in both size and number — as of October, $50.8 billion was invested in 1,073 deals.

“I think 2011 is going to be a great year in the equity markets,” says David Gruber, managing director of KeyBanc Capital Markets. While not as many dollars have been raised in [the United States] in 2010, the market is healthier — deals are trading better and the equity raising is for strategic purposes, he says. Private sources of both equity and debt have also returned. Hedge funds are corralling billions from wealthy individuals, and insurance companies are eager to match-fund their long-term liabilities.

Not that markets will be impervious to shocks from the outside, especially as the U.S. government tweaks monetary policy to energize consumer and business spending and a new Congress changes the political climate. A continuing weak U.S. dollar, for example, could push even more fixed-income investors to emerging and other offshore markets. Or, if inflation expectations rise, corporate bond sales could be scotched.

So it wouldn’t be wise for CFOs to write their capital-raising plans in ink, or assume that fund-raising vehicles will be available when the right investment appears. But, barring major dislocations, the prognosis for 2011 is good.

If trends continue, companies will find willing investors in both debt and equity markets in 2011.

Careful Money

That said, in the IPO market, investors continue to be picky. IPOs from Asian companies performed the best in the third quarter — 5 of the top 10 debuts overall were American Depository Receipt listings, according to Renaissance Capital. The shares of India-based online travel outfit MakeMyTrip, for example, climbed 89% on the first day and rose another 47% in aftermarket trading. But IPO investors have not been “indiscriminate,” says Renaissance. Shares of ShangPharma Corp., a China-based biotech research-and-development outsourcing firm, fell 7% in their first week.


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