Monday, July 22, 2013

Private Equity: The Smart Alternative to Penny Stock and Micro Cap Investing

New laws regarding penny stock, micro cap stock, and over the counter company investments have practically eliminated the retail investor from the sector.  Currently, only accredited investors have the ability to invest in these high risk companies, and without accredited status, an investor has no way to enter the world of "High risk, High return".

Regardless of your current status or trading ability, more and more investors are starting to see the value in "Private Equity".  As the world turns, the recession of the last few years has sprouted numerous great investment opportunities.  Initially the stock market crash left blue chip and micro cap companies alike either undervalued when compared to their earnings or with low P/E ratios making these investments lucrative to those wishing to enter the stock market for the first time.  Similarly, the real estate market has shown ROI in some markets dwarfing the return one could make in the public stock markets.  As the real estate market bounces back up and stock gain traction upwards, investors are left looking for those extraordinary returns that where so commonly available just months ago; in steps Private Equity.
In finance, private equity is an asset class consisting of equity securities and debt in operating companies that are not publicly traded on a stock exchange. 
A private equity investment will generally be made by a private equity firm, a venture capital firm or an angel investor. Each of these categories of investor has its own set of goals, preferences and investment strategies; however, all provide working capital to a target company to nurture expansion, new-product development, or restructuring of the company’s operations, management, or ownership.
Bloomberg Businessweek has called private equity a rebranding of leveraged buyout firms after the 1980s. Among the most common investment strategies in private equity are: leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital. In a typical leveraged buyout transaction, a private equity firm buys majority control of an existing or mature firm. This is distinct from a venture capital or growth capital investment, in which the investors (typically venture capital firms or angel investors) invest in young, growing or emerging companies, and rarely obtain majority control. 
Private equity is also often grouped into a broader category called private capital, generally used to describe capital supporting any long-term, illiquid investment strategy. -Private Equity 

Now that you have a better understanding of what Private Equity is, let us explain why Private Equity is a smart alternative to Penny Stock or Micro Cap Companies trading over the counter.  The simple answer is valuation.  Most penny stocks trading below $1 (and most trading below $5) have valuation in the millions.  Small private companies with no revenues often are perceived to have no value.  This lends opportunity to the investor looking for a sizable equity stake in the target company.

Here is an example:  Public Company A has a stock price of $1 and 1 million shares outstanding.  This means the company has a market cap of $1,000,000 ($1 x 1 million shares).  To acquire 10% of Public Company A, an investor would need $100,000 and a stock trading account that allows the trading of OTC stocks (not as easy to obtain as it used to be).  Private Company B has little to no revenues and the valuation of the company is subjective to what the owner believes it to be.  For example a private online store like TagSale.CO, a start-up can be valued at $100,000 or $0 depending on how it is viewed by the owner.  This private company investment is inherently cheaper than the public company alternative.  Furthermore, the red-tape or complications of gaining this equity stake is easier than becoming an accredited investor for the purposes of trading OTC companies.

Private Companies are easier to buy into in today's trading environment where the retail investor has been secluded from making investments in OTC or Penny Stock companies if they do not meet the accredited status.  One can gain equity in private companies via partnership agreements, LLC membership units, or common stock issued through the State in which the company is incorporated.  With lower valuations in the private sector, investor reap the rewards of being able to negotiable a higher percentage of the company's equity with the founders or owners.  Have an opinion??  Comment below and let us know what you think...

The MicroCapCompany Team
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About the Author: Nicholas Coriano is a Business Consultant and Planning Guru.  He is a graduate of The University of Connecticut Business School and the John Marshall Law School in Chicago.  He has worked at Merrill Lynch, The New York Stock Exchange and as an Investor Relations Agent & Consultant to Micro Cap Companies and Penny Stocks.  He is the founder and author of The a blog focused on providing information and advice to Micro Cap Company Executives and Investors.  You can also find him blogging about Social Media, SEO, Web Development and Tech on

About MicroCapCompany.COM: MicroCapCompany.COM (The Blog) is a blog focused on providing articles, news and information on the micro cap sector and start-ups.  The Blog is a free service offered by Cervitude™ Investor Relations (a micro cap investor relations firm) and offers compensated research reports and business plan writing services for micro cap companies and penny stocks.  If there is a particular topic you would like to see covered on The Blog, email, If you would like to advertise on The Blog, click here

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