LM 3: Investments in Private Capital: Equity & Debt Flashcards
Describe the 2 types of private capital.
private equity: gathers investors money and uses funds to invest in private companies or buy out public companies.
private debt: debt financing to companies from investors, rather than banks, bank-led syndicates, or public markets.
What are the 3 primary approaches to private equity investing? LVG
- leveraged buyouts
- venture capital
- growth capital
What is a leveraged buyout?
purchase of public or private companies using a lot of debt
What are 2 types of leveraged buyouts (LBO)?
- Management buyout (MBO)
- Management buy-in (MBI)
What is the difference between management buyouts and management buy-ins?
management buyouts: the existing management team remains intact and participated in LBO.
management buy-in: external management is brought in to supplement or replace the existing management team
What is venture capital?
provide equity funding for new companies in the early stages of development
What are the 4 financing stages of venture capital investments?
- pre-seed capital (aka angel investing)
- seed-stage financing
- early stage financing
- later-stage financing
What is pre-seed capital?
provides capital to support activities such as the development of a business plan.
What is seed-stage financing?
provides capital for product development and market research
What is early-stage financing?
provide capital for initial phase of commercial production & sales
What is later-stage financing?
after a company has started generating revenue, but before it is ready to go public through an IPO.
used to expand operations, improve products, and launch market campaigns.
What is mezzanine-stage financing?
used to help a company go public, and bridge capital used to keep a company operating while it prepares to issue equity in an IPO.
mezzanine financing refers to issuance of hybrid securities such as convertible debt and convertible preferred shares
What is growth capital?
provides capital for a company’s expansion during the period when it no longer requires VC investments but before it is mature enough to be considered as a potential LBO target
What is PIPE’s?
private investments in public equities
involves the selling of publicly traded common shares or some form of preferred stock or convertible security to private investors.
What is the difference between venture capital, growth capital, and leveraged buyouts in terms of how established a business is?
Venture capital: start-up business
Growth capital: more established business
Leveraged buyouts: mature business
What are the 2 main exit strategies used by private equity investors?
- trade sales
- public listing
What is a trade sale?
selling the company to a strategic buyer
eg. competitor
What are the 4 advantages of a trade sale? CSET
- Cash is received immediately
- Strategic buyers typically offer higher valuations due to synergies
- Execution is relatively fast and simple
- Transaction costs and disclosure requirements are lower compared to an IPO
What are the 3 strategies under public listing?
- IPO
- Direct Listing
- Special Purpose Acquisition Company (SPAC)
What is an IPO?
refers to the process of offering shares (raising capital) of a private corporation to the public in a new stock issuance.
What is a direct listing?
company’s shares being listed on a public exchange. however, no need for underwriting since no new capital is raised.
What is SPAC?
shell company raises cash through an IPO with the intention of buying a private company and taking it public
cash raised is held in trust until used.
How long does SPACs have to find a deal before money is returned?
usually 24 months
What are 3 other exit strategies for private equity investors besides trade sales and public listing?
- recapitalization
- secondary sale
- liquidation
What is recapitalization?
the process of restructuring a company’s debt and equity mixture, often to stabilize a company’s capital structure.
(exchanging one type of financing for another.)
eg. when a company issues debt to buy back its equity shares.
What is secondary sales?
involves selling a position to another private equity firm or group of investors.
What is write-offs/ liquidations?
when things don’t go well private equity firm salvages what it can and then moves onto other projects.
What are the 4 categories of private debt? DMVD
- direct lending
- mezzanine loans
- venture debt
- distressed debt
What is direct lending?
when a private debt firm provides capital directly to the borrower and receives interest and principal payments
What is mezzanine debt?
bridge financing option that gives a lender the right to convert to an ownership or equity interest in the investment opportunity if the loan is not paid back in time and in full
What is venture debt?
debt provided to start-up or early-stage companies
What is distressed debt?
buying debt of mature companies that are in financial difficulty (verge of default or bankruptcy proceedings)
What is unitranche debt?
combines different tranches of secured and unsecured debt into a single loan with a single blended interest rate.
What are specialty loans?
debt extended to borrowers in specific situations, such as finance legal fees, expenses in litigation
What is real estate debt?
loans provided for real estate financing collateralized by a specific RE asset or property
What is infrastructure debt?
debt used to finance construction, operation, and maintenance of infrastructure assets
What are collateralized loan obligations?
Single security backed by pools of loans divided into tranches with different levels of seniority
What is vintage year?
refers to the year in which a fund began making investments or, more specifically, the date on which capital was deployed to a particular company or project
Order the following strategies for private debt from least risky to most risky.
- Debt Mezzanine
- Senior Real Estate Debt
- Private Equity Co-Investments
- Senior Direct lending
- Unitranche Debt
- Infrastructure Debt
- Infrastructure Debt
- Senior Real Estate Debt
- Senior Direct lending
- Unitranche Debt
- Debt Mezzanine
- Private Equity Co-Investments
What are 2 risks associated with direct lending?
- concentration risk (requires large capital commitment)
- reduced diversification
What are 3 characteristics of direct lending? LPL
- loan is typically senior and secured
- provided by small number of investors
- leveraged loans are commonly used
What are 2 reasons private equity returns are often overstated?
- Survivorship bias
- Backfill bias
Does private equity, private debt, or venture capital provide the most diversification benefits?
venture capital lowest correlations among major market indexes, provides the most diversification
At which stage do venture capital funds start making investments?
seed stage.
angel investing/pre-seed capital is usually from family and friends.
