Private Capital Flashcards
What is private capital?
Funding provided to companies that is not sourced from the public markets, such as from the sale of equities, bonds, and other securities on exchanges, or from traditional institutional providers, such as a government or bank. Capital raised from sources other than public markets and traditional institutions and in the form of an equity investment is called private equity. Comparably sourced capital extended to companies through a loan or other form of debt is referred to as private debt.
What are three strategies of private equity?
Leveraged buyout (LBO)
Venture capital (VC)
Growth capital
What are LBOs?
Leveraged buyouts, or highly leveraged transactions arise when private equity firms establish buyout funds (or LBO funds) to acquire public companies or established private companies, with a significant percentage of the purchase price financed through debt. The target company’s assets typically serve as collateral for the debt, and the target company’s cash flows are expected to be sufficient to service the debt. The debt becomes part of the target company’s capital structure after the buyout occurs. After the transaction, the target company becomes or remains a privately owned company. LBOs are sometimes called “going private” transactions because after the acquisition of a publicly traded company, the target company’s equity is substantially no longer publicly traded.
What are different types of LBOs?
Management Buyout (MBO), where the current management team participates in the acquisition.
Management Buy-In (MBI), where the current management team is replaced with the acquiring team involved in managing the company. LBO managers seek to add value by improving company operations, boosting revenue, and ultimately increasing profits and cash flows. Cash flow growth, in order of contribution, comes from organic revenue growth, cost reductions and restructuring, acquisitions and other sources.
What is the difference between Venture Capital and Private Equity investing?
Venture capital entails investing in or providing financing to private companies with high growth potential. Typically, these are start-ups or young companies, but venture capital can be injected at various stages, ranging from concept creation or near the point of IPO. Private equity focuses on later stages in the life cycle of a company.
What is pre-seed capital / angel investing?
Capital provided at the idea stage. Funds may be used to develop a business plan and to assess market potential. The capital here is often provided by individuals such as founders, friends, family, angel investors.
What is seed-stage financing?
Seed capital generally supports product development and marketing efforts, including market research. This is the first stage at which VC funds usually invest.
What is early-stage / start-up stage financing?
Capital that goes to companies moving toward operation but prior to commercial production or sales. (Early-stage VC)
What is later-stage financing?
Capital that comes after commercial production and sales have begun but before an IPO. Funds may be used to support initial growth, a major expansion, product improvements, or a major marketing campaign. Later-stage financing generally involves management selling control of the company to the VC investor.
What is Mezzanine-stage financing (Mezzanine VC)?
It prepares a company to go public as it continues to expand capacity and enhance its growth trajectory. It represents bridge financing needed to fund a private firm until it can execute an IPO or be sold. The term mezzanine-stage is used because it is infused between private and public company status.
What is the difference between Mezzanine financing and Mezzanine-stage financing?
Mezzanine financing includes a equity-debt hybrid instrument to finance a firm, while mezzanine-stage financing refers to the bridge financing a company needs to go public.
What are PIPEs?
Private investments in public equities.
A PIPE transaction is a private offering to select investors with fewer disclosures and lower transaction costs that allows the issuer to raise capital more quickly and cost-effectively than with other means that may be more regulated, expensive, and lengthy.
Describe the broad exit strategy of private equity.
Private equity firms seek to improve new or underperforming businesses and then exit them at higher valuations, buying and holding companies for an average of five years.
What are the two main exit strategies for private equity firms?
Trade sale and public listing (IPO, direct listing, SPAC)
What is a trade sale?
In a trade sale, a portion or a division of the private company is sold either via direct sale or auction to a strategic buyer interested in increasing the scale and scope of the existing business. Because the transaction may have an impact on the competitive environment, it may face regulatory scrutiny and approval or management or employee resistance.
What are advantages and disadvantages of a trade sale?
A strategic investor will be willing to pay a premium as they price in potential synergies with their existing business. Also, it is a relatively fast, cheap and simple transaction to perform.
However, there could be potential resistance from existing members of management, who may fear their job security and may wish to avoid ownership by a competitor. Also, management and employees may resist a private transaction because a public listing would monetize the shares and potentially attain a higher sale price. Finally, universe of trade buyers may be limited, which can raise scrutiny and reduce prices.
What is a public listing to exit a private equity investment?
Public listing on an exchange can take place either as an initial public offering (IPO), a direct listing, or a special acquisition company (SPAC). IPOs are the most common means of raising capital in public equity markets using financial intermediaries to underwrite the offering. When a private equity firm or company founder takes a company public, the portfolio company sells its shares.
What are advantages and disadvantages of an IPO?
An IPO may realize the highest price for the company, it may increase the visibility of the company and it would continue to provide an upside for the PE company because it retains a share in the new public entity. It also likely that management will be retained which is positive.
However, IPOs involve high transaction fees to investment banks and lawyers, the time to complete the transaction may be long, and it requires onerous disclosure. Also, the public equity market introduces stock market volatility, and the potential lockup period may limit a quick realization of gains.
What is a Direct Listing to get a firm public?
The equity of the entity is floated on the public markets directly, without underwriters, which reduces the complexity and cost of the transaction.
What is a SPAC?
Special Purpose Acquisition Company is a “blank check” company that solely exists for the purpose of acquiring an unspecified private firm and take it public.
What are advantages and disadvantages of a SPAC?
SPAC transactions provide an extended time for public disclosure on company prospects to build investor interest, flexibility of transaction structure to best suit the company’s context, and association with potentially high-profile and seasoned sponsors and their extensive investor network. Also, the valuation of the entity is fixed in advance and doesn’t change, which reduces volatility and uncertainty.
However, SPACs increase the cost of capital because the various capital instruments are dilutive. Also, there is a valuation spread between the value of the SPAC equity and the fair value of the real equity. Also, there is deal risk. Finally, it can lead to stockholder overhang, which is the downward pressure on the share price as large blocks of shares are being sold on the open market.
What are some other exit strategies for PE firms?
Recapitalization, secondary sale, write-off/liquidation.
What is recapitalization for PE firms?
Recapitalization via private equity describes the steps a firm takes to increase or introduce leverage to its portfolio company and pay itself a dividend out of the new capital structure. A recapitalization is not a true exit strategy, because the PE firm maintains control, however, it does allow the PE investor to extract money from the company to pay its investors and improve its IRR.
What is a secondary sale for PE firms?
Sale of the company to another private equity firm or group of financial buyers. With the considerable amount of funds raised by global PE, there has been an increase in the proportion of secondary sale exits.
