Yorkville Takes A Bite Out Of Credit Crunch

Oct 22 2007 | 12:55am ET

While the current credit crunch is squeezing many a hedge fund, things can’t be any better for the folks at Yorkville Advisors. The $900 million structured finance shop’s YA Global Investments fund is up 10.11% year-to-date and is almost halfway to its $2 billion target. 

Mark AngeloMark AngeloThe firm, formerly known as Cornell Capital Partners, recently entered into joint venture agreements in Italy and Israel, and is close to inking further JVs in Greece and Japan with an eye towards Latin America as well. “We’re taking our innovative financing solutions into markets that have never seen them before,” said Mark Angelo, founder.

A Little SEDA Goes A Long Way

Yorkville employs the Standby Equity Distribution Agreement in small-cap financing deals, whereby it commits to purchasing an agreed-upon dollar amount of a company’s shares, in a series of small tranches. The commitment is for up to two years, renewable thereafter, and the gist of it is that it is entirely controlled by the company.

Angelo points to a SEDA investment in an Italian tourism company as an example of how effective such financing arrangements can be. The company, laden with declining equity, had offers for an equity infusion on the table from large investment banks. “The problem is that they were essentially giving away a lot of equity at a very low price, but we came in with a structure that, candidly, the country has never seen before,” explained Angelo.

After implementing the SEDA arrangement, Angelo said its stock increased to about 25% in value over a period of a few months and its equity value subsequently rose almost 100%. “It was a win for all parties because some of the banks that took a write-down in the position because they had a lot of bad loans in this particular company, were compensated on the equity side and came out in positive territory.”

Investment Bankers At Heart

Yorkville boasts six deal teams and invests in a broad array of businesses with under $500 million in market cap. Angelo said the firm’s AUM and its smaller targets put it in a “very unique place” as the largest players in this space.

“Investment banks usually do a public offering and many issuers today feel they can get better economics through a private offering, and that’s what we do. As you’re going upstream and dealing with higher caliber companies, you’re taking businesses away from banks. We’re really an investment bank, merchant bank in a fund structure. We have the ability to be creative and flexible, which differentiates us.”
Deal flow is anything but lagging, according to Angelo, who said the firm closed on 21 of the 96 deals that it reviewed in the last quarter.

¡Viva Latin America!

The current volatile credit environment may be helpful to Yorkville because banks saddled with bad loans are unwilling to take on additional risks in their portfolios. Also, companies get quicker access to cash without a lot scrutiny and at better terms than with traditional lenders.

“Because of all the volatility in the market, there are companies that are not willing to go the public route,” said Angelo. “Some more of those companies may be inclined to do private transactions and some of the traditional lenders who have been hurt by what’s happening on the credit side may also be unwilling to take credit risks with some of these issuers.”

There is relatively low volatility within Yorkville’s portfolio because of the size of its investments, said Angelo, adding that the firm is not subject market volatility because of its market neutral strategy.

Going forward, the firm is looking toward Latin America, specifically Argentina and Brazil, for investment opportunities. “They’re just extremely vibrant markets and have favorable regulatory systems to work in,” said David Gonzalez, partner. “You see a lot of big banks moving into Brazil and once you see that trend, it’s just a sign of that market gaining ground.”

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