Investments in Private Capital Flashcards
Management buyouts
Company’s existing management team participates in purchase
Management buy-ins
PE manager replaces portfolio company’s management team
[VC] Formative stage
1) Pre-seed / Angel investing: Ideation stage - used for business plans and market potential
2) Seed-stage: Product development, marketing, market research (Usually VC capital comes in)
3) Early-stage: Leads up to production and sales
[VC] Later-stage financing
Support initial growth, expansion, product improvement, marketing
[VC] Mezzanine-stage financing
Capital provided to prepare firm for IPO
Minority equity investing
Less-than controlling interest in public companies that are looking for capital (through PIPE)
[Exit Strat] Trade Sale
Sell portion of private company to strategic buyer
- Usually receive premium
- Faster than IPO with lower transaction costs
[Exit Strat] Public listing
IPO / Direct listing / Special purpose acquisition company
- Direct listing: Stock is floated on public market without underwriters
- SPAC: Entity set up to raise capital to acquire unspecified company (must be done in set time)
SPAC Adv / Disadv
Advantages
1) Flexible vs. IPO
2) Reduce uncertainty about valuation of portfolio company
Disadvantages
1) Dilutive effects from SPAC shares
2) Spread between SPAC and value of company
3) Stockholder overhang - SPAC holders selling after acquisition announced
Recapitalization
Debt issued to fund dividend distribution
Secondary sale
Sell to another PE group
Write-off / Liquidation
Take losses from an unsuccessful investment in portfolio company
Direct lending
Loands made directly to private companies without an intermediary
Leveraged loan
Loan made by private debt fund using borrowed money
Venture debt
VC backed start-up or early-stage firm debts (preferred by founders of younger companies)
Mezzanine debt
Private debt subordinated to senior secured debt - may have conversion rights, warrants
Distressed debt
Debt of mature companies in financial trouble
- Fund actively resturctures existing debt
- Usually identifies otherwise good companies with cash flow problems
Unitrance debt
Combines different classes of debt into single loan with interest rate
Interest rate of private debt
- Usually higher than traditional bonds
- Set relative to reference rate such as SOFR
Benefits of private capital investments
- Low correlation with public market index: diversification
- Vintage year: year the fund made the first investment
- Diversifying vintage years is crucial as economic cycles decide gains from investments
