TOXIC LOAN Proof from Alpha Capital Alpha’s investments often increase in the first year before the firm and its co-investors convert debt, exercise warrants, and flood the market with shares.
Excluding investments after 2018 creates a very different picture. The average annualized rate of return falls to -51%. The farther back in time we go, the worse the returns appear. Excluding investments after 2015 yields an average annualized rate of return of -60%. Excluding investments after 2012 decreases the rate to -78%.
Companies that raise capital by selling dilutive instruments often enter a multi-year death spiral. With the specter of unexercised warrants and unconverted debt hanging over them, it’s hard for them to attract interest in public offerings. When they inevitably need more capital, they must return to the same toxic lenders and investors and sell more dilutive instruments on even less favorable terms than before. Over several years, a company’s balance sheet and stock price can deteriorate beyond the point of no return. Several such companies appear on our list of Alpha’s investments to include Western Magnesium Corporation (V.WMG).
We urge investors to exercise caution if they see that Alpha has invested in a company they are researching. Look carefully for outstanding warrants, convertible promissory notes, convertible debentures, and convertible preferred stock, all of which could quickly expand a company’s float, dilute investors’ holdings, and depress the company’s stock price.
If you have traded or invested in securities owned by Alpha, please contact us to share your experience with fellow investors.
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