Sourcing: Pink Sheet and OTC Companies

December 04, 2018

by a searcher from Harvard University - Harvard Business School in Boston, MA, USA

Has anyone considered leveraging publicly traded companies for deal sourcing? I am looking at a couple right now, have signed NDAs and exploring - however, the conversations I have had to date with external advisors - show that the transaction expenses will be much more significant than traditional deal constructs (e.g., P2P transactions). Obviously this impact returns - as the deal expenses representing ~10% of equity will create a higher threshold to enter the incentive fee. Thanks in advance!

ER

Reply by a searcher
from Emory University in Atlanta, GA, USA

Good comments. Thank you. I have been considering the same question for several months now. All of the comments about DD and "be careful" should be noted. I expect these companies have already spent significant effort bobbing and weaving to hide losses and exaggerate profits. But don't most companies do the same?

I would expect the greatest difference between pink sheets and privately owned businesses are the paperwork and the middlemen.

Reply by a searcher
from University of California, Berkeley in San Francisco, CA, USA

I think it was flavor of the month about 10 years for service providers (lawyers and CPAs) to sell companies the notion that OTC would improve access to capital without stringent filing requirements. Whether these companies have a sound business isn't solely rested on whether they are OTC. But like others have said, be careful and do some enhanced diligence. Advisors fees is part of deal cost; I wouldnt walk away if the deal pencils out otherwise.

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