Variable Vs. Fixed Pricing W Pics

Variable vs. Fixed Pricing for Equity Transactions

Advantages and Disadvantages

October 3, 2008

• $2.7B AUM in primary funds

• 200+ transactions funded in 29 countries

• No effective upper limit

• Harvard Honors Thesis Topic – Efficient Pricing in a Specialist Exchange System– 30 Years Ago

Sterling Atlantic & Affiliates

• Invested funds result in increased EBITDA and stock price

• Funds expended over development period 6-18 months

• Milestones can be accomplished and announced, stock price likely to appreciate

• Issuer determines when needs capital

• Immediate commitment is important

Ideal Variable Price Situation

• All capital expended at closing

• Use is to restructure fixed price debt

• Future prospects not favorable

• No immediate need for commitment or capital, time for investor due diligence

• No Fixed Rate Trap

Ideal Fixed Price Situation

• Fundamental– Warren Buffett– Cash Flow Focused– Slow Decisions- due diligence oriented

• Trader– George Soros– Trend, Liquidity, and Arbitrage Focus– Rapid Decisions

• Hybrid– Fundamental-Long Bias– Structure Focus– Rapid Decisions

Investor Types

Stock Price Up Scenario

Assumptions:• Stock sold once quarterly• Variable Price Discount: 10%• Fixed Price Discount: 15%

Average Variable Price Per Share: 15.75

Fixed Price Per Share: 8.50

Difference: 7.25

% of Fixed Price 85.3%

0

5

10

15

20

25

30

Q1 Q2 Q3 Q4

Stock Price

Stock Price Flat Scenario

Assumptions:• Stock sold once quarterly• Variable Price Discount: 10%• Fixed Price Discount: 15%

Average Variable Price Per Share: 9.00

Fixed Price Per Share: 8.50

Difference: 0.50

% of Fixed Price 5.9%

0

2

4

6

8

10

12

Q1 Q2 Q3 Q4

Stock Price

Stock Price Down Scenario

Assumptions:• Stock sold once quarterly• Variable Price Discount: 10%• Fixed Price Discount: 15%

Average Variable Price Per Share: 6.25

Fixed Price Per Share: 8.50

Difference: (2.25)

% of Fixed Price (26.5)%

0

2

4

6

8

10

12

Q1 Q2 Q3 Q4

Stock Price

Volatility Scenario

Assumptions:• Stock sold once quarterly, not

at low points• Variable Price Discount: 10%• Fixed Price Discount: 15%

Average Variable Price Per Share: 12.50

Fixed Price Per Share: 8.50

Difference: 4.00

% of Fixed Price 47.0%

0

2

4

6

8

10

12

14

16

Q1 Q2 Q3 Q4

Stock Price

Fixed Price Trap

• Fixed Price transaction Jan 08

• Goldman Sachs Investor

• Jeffries – Investment Banker

• 80% price drop when issuer told they were getting a fixed price

• Blue Chip participants offer no protection

• Company committed but (i) price variable prior to closing or (ii) substantial over-allotment

Share Price Effect of Large Fund Commitment

Investors Chronicle found average share price increase of 69% after obtaining financing commitment

Share Price Effect of Large Fund Commitment

“Unlike open-ended convertible bonds, where the interests of equity shareholders and bondholders are not aligned (the lower the share price, the greater the dilution for shareholders on conversion), the GEM model clearly works in the favour of shareholders.

First, news that an equity credit line agreement is in place can act as a kicker to the share price as the stock market acknowledges that future funding concerns have been resolved. To a certain extent this happened with electronic software designer Easyscreen, whose share price more than doubled in the three months after the agreement was signed. Second, there is an incentive for the firm to exercise the subscription option after a period of heavy trading in the shares (thus maximizing the number of shares that can be subscribed for under the agreement), and when the share price is as high as possible, to increase the amount of funds released.”

Investors Chronicle, page 17, May 2002

Appreciate your time and interest!!

Conclusion