Topic 10 - Investment Banking and Venture Capital

Question 1

Investment Bank

Answer 1

• Specialises in helping businesses and governments sell new security issues in the primary market (to finance capital expenditures)
• Creates secondary markets for the securities as brokers and dealers
• Able to conduct commercial banking activities if they acquire ADI status (Banking Act 1959)

Question 2

Commercial Bank

Answer 2

Can accept deposits, make loans, underwrite securities, engage in brokerage activities, sell and manufacture other financial services (like insurance)

Question 3

Business Structures

Answer 3

• Licensed Bank
• Money Market Corporation
• Securities Company

Question 4

Primary Offerings

Answer 4

New issues of stocks and bonds

Question 5

IPO

Answer 5

Initial Public Offering - company’s first time offering securities to the public

Question 6

Seasoned Offering

Answer 6

The company has already offered similar securities in the market

Question 7

Acting as a Broker

Answer 7

Earn commission for bring buyers/sellers together

Question 8

Acting as a Dealer

Answer 8

Creating a market that sees the banker ready to buy/sell security

Question 9

Full Service Brokerage Firms

Answer 9

Attend to all customer needs;

• Store securities
• Execute trades
• Investment advise
• Margin credit
• Cash management systems

Question 10

Discount Brokerage Firms

Answer 10

• Take customer orders

- Pass savings onto clients

Question 11

Project Finance

Answer 11

Financing a large project, usually without much collateral (limited recourse basis), usually syndicated

Question 12

Mergers & Acquisitions

Answer 12

High profit!

• Identify candidates
• Provide advice
• Negotiate deal
• Obtain funds to finance acquisition

Question 13

IPO Three Step Process

Answer 13

1. Origination
   (feasibility, sourcing funds, how much $, provide advice)
2. Underwriting
   (investment bank buys securities)
3. Distribution
   (bankers try to sell as quickly as possible)

Question 14

Venture Capital

Answer 14

Institutional investors who provide equity financing to young businesses and play an active role in advising their management

Major source of funds/equity capital for new businesses

Usually step in after owner’s equity exhausted & before IPO

Question 15

Who are Venture Capitalists?

Answer 15

Sophisticated individual investors, seeking high returns and willing to bear high risk

Funds usually raised from variety of sources e.g. super funds

Usually will have big say over management decisions

Question 16

Government & Venture Capitalists

Answer 16

Governments see potential benefits of: Economic growth, employment growth, follow-on economic and social benefits

Question 17

Seed Financing

Answer 17

Capital provided in idea stage

Question 18

Start-up financing

Answer 18

Capital provided in product development/initial marketing

Question 19

First-stage finance

Answer 19

Capital provided to initiate manufacturing and sales

Question 20

Second-stage finance

Answer 20

Capital used to finance company that has already starting producing/selling product

Question 21

Third-stage finance

Answer 21

Capital provided to fund major expansion/product improvement/marketing

Question 22

Bridge finance

Answer 22

Capital provided to company that expects to go public within a year or so

Question 23

Turnaround financing

Answer 23

Funds provided to rescue company from financial distress

Question 24

Management buyout

Answer 24

Managers of a business buy the business from owners/shareholders

Question 25

Obtaining Venture Capital (if you’re a business owner)

Answer 25

• Submit application by writing business plan

- Venture capitalists will rigorously investigate and choose a deal to invest in