Topic 10 - Investment Banking and Venture Capital Flashcards
Investment Bank
- 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)
Commercial Bank
Can accept deposits, make loans, underwrite securities, engage in brokerage activities, sell and manufacture other financial services (like insurance)
Business Structures
- Licensed Bank
- Money Market Corporation
- Securities Company
Primary Offerings
New issues of stocks and bonds
IPO
Initial Public Offering - company’s first time offering securities to the public
Seasoned Offering
The company has already offered similar securities in the market
Acting as a Broker
Earn commission for bring buyers/sellers together
Acting as a Dealer
Creating a market that sees the banker ready to buy/sell security
Full Service Brokerage Firms
Attend to all customer needs;
- Store securities
- Execute trades
- Investment advise
- Margin credit
- Cash management systems
Discount Brokerage Firms
- Take customer orders
- Pass savings onto clients
Project Finance
Financing a large project, usually without much collateral (limited recourse basis), usually syndicated
Mergers & Acquisitions
High profit!
- Identify candidates
- Provide advice
- Negotiate deal
- Obtain funds to finance acquisition
IPO Three Step Process
- Origination
(feasibility, sourcing funds, how much $, provide advice) - Underwriting
(investment bank buys securities) - Distribution
(bankers try to sell as quickly as possible)
Venture Capital
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
Who are Venture Capitalists?
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
Government & Venture Capitalists
Governments see potential benefits of: Economic growth, employment growth, follow-on economic and social benefits
Seed Financing
Capital provided in idea stage
Start-up financing
Capital provided in product development/initial marketing
First-stage finance
Capital provided to initiate manufacturing and sales
Second-stage finance
Capital used to finance company that has already starting producing/selling product
Third-stage finance
Capital provided to fund major expansion/product improvement/marketing
Bridge finance
Capital provided to company that expects to go public within a year or so
Turnaround financing
Funds provided to rescue company from financial distress
Management buyout
Managers of a business buy the business from owners/shareholders
Obtaining Venture Capital (if you’re a business owner)
- Submit application by writing business plan
- Venture capitalists will rigorously investigate and choose a deal to invest in
