The prevailing wisdom is that in times of depressed stock markets and equity valuations, it is a bad time to raise equity or sell a company. There is some truth to this, as there is an extremely high probability that a given company is worth less today than a year or two ago.

Nevertheless, there are at least three specific circumstances where company owners would be well advised to consider such a transaction.

Survival
Today’s debate is whether we are in recession or depression. Regardless of which category we fall under, there is a very plausible prediction that the economic situation could become significantly worse before it gets better, especially in Central Europe, and as a result, a significant number of companies face the danger of financial collapse or severe difficulties. Such companies would definitely be better off to find an investor — and soon — preferably before performance indicators begin deteriorating significantly.

For such companies, obtaining an equity investment may be a question of survival.

Portfolio diversification
If one or more shareholders have a significant percentage of net worth in a company, which is often the case, shareholders would be well advised to consider diversification, because having "all eggs in one basket", particularly in this time of financial turmoil and heightened risk, is unwise. Very often, other assets in the marketplace would have deteriorated considerably more than the value of their own firm.

Most Central European stock exchanges have fallen between 50 per cent and 80 percent in the past 12-18 months. Hence, if the value of your company has fallen in value by only 30 per cent in the past year, but alternative investments have fallen even more, you would be in an even better position to diversify your portfolio today, compared with 12 to 18 months ago.

Strengthen the company
Even if shareholders do not wish to sell control of a company, an equity infusion may provide a significant competitive advantage over industry competitors. In times of financial stress, there are often excellent acquisition opportunities. Marketing is less expensive, and competitors typically cut back advertising budgets; hence, it is a good time to advertise and gain market share. The best people can often be hired in times of slowdown.

There are numerous other examples of how, as the Chinese discovered thousands of years ago, crisis may create opportunity. A financial infusion may help finance such activities, turning crisis into opportunity.

A recurring theme of this financial crisis is that the world is experiencing massive de-leveraging. In other words, debt financing is becoming much harder to achieve. New corporate debt financing is declining dramatically in Central Europe, in many instances impossible to obtain.

In many countries, banks are retiring old debts faster than putting new loans on the books! According to the Institute of International Finance, net private capital flows to emerging Europe are projected to fall from an estimated $254 billion in 2008 to $30 billion in 2009.

For those companies with expansion plans or that are seeking capital to survive, raising equity may be the only option. Or if the cost of debt financing increases, the optimal debt/equity ratio may shift in favour of equity.

Contrary to popular belief, the equity financing market has not completely dried up. While equity financing has been challenging to achieve, and there has been a "flight towards quality" in this, as well as in many other areas, the following chart provides a sampling of recent equity transactions:

In conclusion, equity financing may appear counter-intuitive in today’s market conditions, but should not be excluded as a financing option, particularly for recession resistant companies, in sectors such as pharmaceuticals, food and beverages.

*Les Nemethy is the chief executive officer of Euro-Phoenix Financial Advisors Ltd. (www.europhoenix.com), a Central European corporate finance company focused on mergers and acquisitions