We were honored to interview Kelly McCarthy for this issue’s Lookout department. A veteran investment banker who has completed more than 20 public offerings as well as numerous private placements, corporate governance and investor advisory assignments, Ms. McCarthy is president and founder of InfusionCapital, LLC, a consulting firm that specializes in helping small-cap companies access the public capital markets and advising them on corporate governance and communications to the Wall Street community. She can be reached at 407-301-2131 or KELLY@infusioncapital.com

Kelly, how did you get into the financial industry?

I was living in the Washington, D.C., area, and on weekends, for extra income, I worked in a car dealership, selling cars. I had just graduated from high school and was beginning college when I sold a car to a stockbroker and we quickly became friends. He was really the catalyst for my entering the financial industry. He encouraged me and let me know that many of the broker dealers, especially the large wire houses, were now starting to recruit. At the age of 21, I acquired my Series 7 and began working. I was going to go work for a large wire house but I ran into a small broker dealer called Cohig & Associates and decided that that was more my type of place. There were about 400 people in the firm and I felt that I would have a greater experience and develop strong relationships there. They specialized in small companies, and that was something that I was passionate about from the very beginning. So I began my career as a stockbroker in 1990 with Cohig & Associates.

What was your greatest success in the beginning of your career?

My greatest success at the beginning of my career was developing my retail book of business around very high net worth individuals. Since I had a large book of accredited investors I was always one of the brokers chosen by our investment banking department to participate in private placements. That led to my joining the investment banking department and eventually running it. During that time a gentlemen came into the office and talked to us about his dream of building an airline in Denver, Colorado. He had a rough sketch business plan. He didn’t own an airplane or a license to fly one. His name was Sam Addoms, and within two years we had raised him money, through private placements and then eventually a public offering which launched Frontier Airlines.

Where do you see the industry going in the next five years?

I believe strongly that we will see less and less commission-transactional business and we will continue to move more into asset management, specifically asset allocation. Many people will be looking to their financial advisors to not only advise them on their equity investments and their debt investments but also across the spectrum. They are going to want to be able to go to one place for all their needs to be serviced. They will want that person to be able to evaluate their real-estate holdings, their insurance plans, their equity holdings, and to really be able to provide them with a comprehensive plan because they don’t want to have to deal with 20 different people for every area of interest. They are going to have to be able to offer a platform that can speak to an individual’s desire to have a comprehensive plan. People want to incorporate their whole investment strategy rather than segmenting it. I really feel that we are going to move much more towards asset-based business and asset allocation models.

Individuals are becoming more and more educated. The Internet has provided information that was never available before and I think investors are really taking a much bigger approach in getting the knowledge that they need to make investment decisions.

We are going to see investors knowing a lot more about companies and asking a lot more questions. People are really investigating and spending time in trying to understand the market. I am very bullish. I think that there are great opportunities out there. I am especially favorable in the small-cap sector and the micro-cap sector. I think that it’s been a much ignored space and that we are going to see some incredible companies emerging. Investors will be drawn to those companies because they have the opportunity to really get to know them. If you have a choice as an investor to invest in GE where you will never have the opportunity to meet the management team and know the philosophy of that company or to invest in a company such as TurboChef where you could actually sit down, meet the management team, listen to conference calls, and participate in what’s going on with that company, your inclination is to do that because you feel like you have a personal relationship and you know a lot more about what’s going on. I think that that’s going to be the trend as people want to know these companies. They don’t want to wake up in the morning and be surprised by CNBC telling you that XYZ Company has just announced a $2 billion loss.

Typically you do private placements and IPOs as the introducing broker. What are the dangers of and rewards for those deals?

When you are investing primarily in private placements and IPOs, obviously those investments carry significant risk. They are usually quite volatile. They are often thinly traded and the companies are typically emerging growth companies. When they are in the emerging growth stage, there are a lot of potential hazards along the way. So as a broker and as an investment specialist, you have to really know your investor. I may have an investor who has the net worth, the liquid assets and everything lines up with what we would consider suitable. However, I know his personality is that he is fairly risk-adverse or he is going to want to have regular communication or be able to know what his investment is doing on a weekly basis. I would avoid those types of investments. They are very speculative and we all know that, but they also have incredible upside potential and I usually talk to investors about investing in private placements when I know that they tend to be more risk-tolerant, they understand that there is the downside potential but they also understand that there’s tremendous upside. Many of these private placements and public companies will take three years to come to fruition. And so this is never a short-term play. You don’t jump into an IPO hoping that it’s going to go 150 percent on the open. You really invest in these companies because you know they’re emerging growth, you know they are going to take the capital that you raised and they are going to put it to use and implement their plan, and that will take time. I always let my investors know that my sweet spot is about 36 months. And we usually will have a very good idea of how the company is performing in the first 18 months. I am very, very cautious in making sure that it’s not only the right asset for that individual but that he or she has the right personality for those types of investments.

Is it possible to generalize what accredited or wealthy investors are looking for?

No, it really isn’t because accredited and wealthy individuals are usually very opportunistic and very entrepreneurial in their thinking. They typically are bored with the status quo and safe investments. They are starting to say to themselves, “I have enough cash or I have enough assets so I am comfortable taking 15 percent of my liquid assets and putting them into something a little more exciting.” They feel like they get a little more hands-on. But you can’t generalize because you also have a guy that has a $100-million net worth and he absolutely won’t put his money anywhere but in treasury bonds. So wealthy individuals are just like anybody else. They are all shapes and sizes, all personalities, all different cultural backgrounds. I know many wealthy individuals who are very motivated to only invest in companies that they feel meet their moral and value mission statement. And then I have wealthy individuals that are very focused on high-high risk, high-high return, regardless of what kind of business the company is in. So it is very hard to generalize, but I am seeing a trend, specifically with the high-net- worth individuals that they are very interested in the smaller company, and maybe that’s because that’s my passion. So naturally I am drawn to people that are drawn to those markets. But they are saying to themselves, “If I am going to invest a million dollars in a company, I would rather invest a million dollars in a company that I can actually pick up the phone and have a conversation with the CEO.”

How has technology helped your business?

Technology has been a tremendous help. Probably the single greatest thing is the ability to communicate en masse. If I want to get a message out to my entire database, I am able to do it in a couple of clicks. It has cut down on my phone time significantly. I can really get a lot of information out to clients and customers, and it even helps on the personal side. I travel quite a bit with the companies I work with, and technology helps me communicate with home as well so that I am able to have that balance. I think the other thing is that the technological advances that have come along have also spawned incredible companies. So there are so many opportunities to get involved with emerging growth companies, especially ones that have technology that is going to displace something. You can see a company going from zero to $100 million in revenue because they have a displacement technology that really revolutionizes an industry. So for me technology has been positive. Maybe the slight negative would be that with the Blackberries and all of these devices it’s sometimes hard to shut yourself off. But all in all, it’s generally been very positive, especially the opportunity to connect with the world. I no longer deal only with investors in my state or in my region or in my country but investors that are in Hong Kong or in Italy or elsewhere.

How much time do you spend on compliance issues?

That amount of time continues to grow. Compliance is clearly a necessary evil. I want my companies to be compliant, I want them to have good board governance and so forth. So if I expect that of them, then obviously my customers and clients should be expecting it of me. You have to be very careful about how you conduct your business, how you communicate. You read an article that you find interesting and innocently decide to send it out to somebody, then realize that it could be deemed an offer to sell, which isn’t at all your intention. So you are having to constantly ask yourself a series of questions to make sure that you have dotted the i’s and crossed the t’s. I tend to believe in compliance and that it’s in place to protect and that there are innocent mistakes made but generally I think that those innocent mistakes are rectified without severe punishment. I think that when we see things happening at companies and with broker dealers that typically it’s because they haven’t been compliant or have tried to walk the gray line. I have been very fortunate that in my entire career I have never had a customer complain. I have never had any glitch at all on my record — and that is not to say that sometimes my customers haven’t lost money, because they have — but they have understood since the beginning that I am going to communicate with them. I am going to give them all the information that I have about a company and we are going to make the best decision we can with that information. I think that that’s probably been a large part of the reason why I have been able to keep my clean record. I do a lot of training; I spend a lot of money out of my own pocket. I attend the Stanford Board School to get compliant on board issues. I am always reading the updates that come out from the SEC and the NASD, and spend a significant amount of my personal time staying abreast of the current legislation. And then through the National Investment Banking Association that I am a member of. Members are very fortunate that through the organization we are educated and have guests constantly coming to us from the NASD, NASDAQ, and the SEC to make sure that we understand what’s in legislation or what potential changes are coming our way.

What are you working on now?

I have just finished a project that was one of the most exciting projects I have worked on in a long time. It is a company called DayStar Technologies, based in Halfmoon, New York, that went public through Paulson Investment Group. Paulson is one of the most prestigious broker dealers on Wall Street. They have an incredible reputation, and it’s always an honor to work with them. DayStar Technologies is a company that specializes in thin-film solar cell technology that I strongly believe is going to revolutionize how we utilize solar power to work with our current electric system. As we all know, we have a limited number of natural re-sources. Fossil fuels will run out. We don’t know when, but they will. We are blessed with wind and tide, and those create electricity as well. But we also have an incredible resource, which is the sun, and I think in the next 20 years we are going to see solar playing a huge role in our energy system. And I think DayStar is going to end up being one of the leaders. So it was an awesome opportunity to work with them and successfully complete their IPO in 2004.

My current project is with J.P. Turner out of Atlanta, Georgia. Another world-class broker dealer organization, they have 600 brokers around the country. The IPO that we are working on is called Integrated Financial Systems, which is going to solve the problem for hospitals and their self-paid patient collections, which is an enormous problem facing the health-care system. Integrated Financial Systems will go public this year. It’s a great company, emerging growth, great technology and, of course, working with a broker dealer that I respect. It is my favorite environment. When I can work with a broker dealer that is a high-class, mission-driven organization, and an issuer offering a technology or service that is for the good of our world, then I have got the perfect fit.