3. IB, Security brokers and Dealers, VC

Question 1

What functions does Investment Banking perform?

Answer 1

Underwrite the initial sale of stocks and bonds
Deal maker in mergers, acquisitions, and spin-offs
Middleman in the purchase and sale of companies
Private broker to the very wealthy

Question 2

What are their areas of expertise?

Answer 2

Underwriting Stocks and Bonds
Equity Sales
Mergers and Acquisitions

Question 3

What services does investment banking provide?

Answer 3

Giving advice (explaining market conditions, helping companies to go public or private)
Filling documents (for SEC, prospectus, credit rating, dealing with exchanges)
Underwriting, Best efforts or Private placement
Equity sales
Acquiring firms or potencial targets
Investment bankers will assist in all areas, including deal specifics, lining up financing, legal issues, etc.

Question 4

What services securities firms with brokerage services offer?

Answer 4

Brokerage service
Other services (keeping documents, margin credit
Full-service vs discount brokers (advices vs only buying/seling)
Securities orders
Securities dealers (holds securities, market makers)

Question 5

Relationship Between Securities Firms and Commercial Banks

Answer 5

• Glass-Steagall stipulated that investment banking and commercial banking would be separated.
• G-L-B Act removed some of these barriers.
• Commercial banks are slowly gaining regulatory permission to engage in the full range of services offered by investment banks.

Question 6

Private Equity Investments

Answer 6

• An alternative to investing via public securities is private equity (P E) investments. Here, a limited partnership raises funds (P E) to invest in new companies, to buyout existing divisions, etc.
• Most common types of P E are venture funds and capital buyouts.
• P E got a boost in 1978 when pension funds were permitted to invest in P E firms.

Question 7

Venture Capital Firms

Answer 7

• These firms provide funds for start-up companies
• Often become very involved with firm management and provide expertise
• Description of Industry
  o Typically limited partnerships
  o Examples of venture-backed firms include Apple Computer, Cisco Systems, Starbucks, T C B Y, etc.

Question 8

How Venture Capitalists Reduce Asymmetric Information

Answer 8

– Long-term motivation
– Sit on the board of directors
– Disburse funds in stages, based on required results
– Invest in several firms, diversifying some risk

Question 9

Structure of Venture Capital Firms

Answer 9

1. Most are limited partnerships.
2. Source of capital includes wealthy individuals, pension funds, and corporations.
3. Investors must be willing to wait years before withdrawing money.

Question 10

Life of Venture Capital Deal

Answer 10

1. Fundrasing
2. Investment phase
   Seed investing
   Early-stage investing
   Later-stage investing
3. Exit
   IPO

Question 11

Private Equity Buyouts. Why go private?

Answer 11

o Avoid S E C regulation, such as Sarbanes-Oxley.
o Provides flexibility and ability to avoid public scrutiny of earnings. Also helps attract top talent no longer interested in the life of a public-company C E O.
o Tax advantages, and high compensation for partners.

Question 12

Lifecycle of a Private Equity Buyout:

Answer 12

o Investors pledge money (usually $1 million or more) and intent to leave money in partnership for 5+ years.
o Partners identify an opportunity, buy it, and then manage its future (typically hire a C E O for day-to-day operations).
o The company is then sold to the public via an I P O.

Question 13

Implications of the Ownership Structure in PE

Answer 13

As the market for underperforming firms becomes more competitive, PE may not perform as well, or industry will shrink.