Week 1 Flashcards
What is private equity and venture capital? / Trends and issues
Private Equity
Venture capital + buyouts/ buyins and replacement capital/ secondary purchases
Venture Capital
Seed, spin-out, start-up, other early stage and expansion/development/growth stages
Simplified Funding Process (LP to IC)
Limited Partners put cash into the fund, this fund is a Private Equity Organisation.
The cash out of the fund is for investment into Investee Companies.
Limited Partners –> PEO –> Investee Companies
Simplified Funding Process (IC to LP)
Private Equity Organisation receive cash from Investee Companies on realisation of investment (e.g. IPO or trade-sale).
The PEO return cash to Limited Partners (generating IRR).
Investee Companies –> PEO –> Limited Partners
Initial Public Offering (IPO)
When shares of company are offered to institutional investors for the first time.
Trade - sale
Common means of exit to a trade buyer. In whole or in part through the sale of shares, assets or liabilities.
Internal Rate of Returns
Calculates ROI, helps decide whether investment is worth it.
Advantages of PE for the Management Team
Solid capital base for the future – to meet growth and development plans
No repayment during term of investment
No interest costs
Business partnership with venture capitalist
- share risks and rewards
- advice and expertise
No charges on business assets
No personal guarantees
If business runs into difficulties, private equity firm will work to ensure company is turned around.
Possible disadvantages of private equity
Possible loss of control, owners have to give up equity stake
PE firm may have veto rights over major decisions
“Hands-on” versus “hands-off” approach?
If business fails, private equity investors rank alongside other shareholders (after banks and other lenders).
Features of Bank Finance (compared to PE)
Short to long-term.
Overdrafts payable on demand; loan facilities can be payable on demand if the covenants are not met.
Useful source of finance if debt to equity ratio is conservatively balanced and company has good cash flow.
Requires regular good cash flow to service interest and capital repayments
Depends on company continuing to service interest costs and maintaining value of assets on which debt is secured.
If business fails, lender has first call on company’s assets.
If business appears likely to fail, lender could put business into receivership to safeguard loan / could make owner personally bankrupt if personal guarantees have been given.
Assistance available varies considerably.
Private Equity compared to Debt (usually debt from bank finance)
Equity:
- Medium to long term
- Risk and reward sharing
- Committed until exit
- Exit focused
Debt:
- Short to long term
- Cash flow based
- May be repayable on demand
- Contract driven
Private Equity compared to Public Equity
Private:
- Directly Negotiated
- Specialist Investors
- Investor Involvement
- Shareholders’ Agreement
Public / Quoted:
- Market / Intermediaries
- Many Investor Types
- Passive Investors
- Governance focus
Private Equity Stages (1): Seed
Seed
Purpose:
- Research, assess and develop business concept
Investee Characteristics:
- Non trading
- No firm business model
Objectives:
- Check commercial viability
- Prepare business plan
- Develop prototype
Private Equity Stages (2): Spin Out
Purpose:
- Form business from (university) research facility
Investee Characteristics:
- As for seed; IP owned by university
Objectives:
- Similar to seed
- However academic to commercial is often a big issue
Private Equity Stages (3): Start Up
Purpose:
- Product development and initial marketing
Investee Characteristics:
- Business may be operational but may not have actual sales
Objectives:
- Prove commercial need, demonstrate market and customers / contracts
