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By CoWin Investment, China. From the web. (Not endorsed.)

Private Equity Investment and Venture Capital Industry

Sheng lijun

A quite revolution has changed forever the way companies gain access to the capital necessary to grow and create jobs. Private equity investment capital is now available to small and large companies in nearly every industry. The three most common types of private equities are venture capital, strategic block investment and leveraged buyouts.

The Europe Venture Capital Association defines capitalist as agents:

Whose main activity consist of the provision of finance by means of a participation in the capital of firms which are in the early stage of their lifecycle and which demonstrate significant potential for growth in areas involving new products or service or new technology.

Whose main objective is the achievement of sufficient capital gains in the medium to long term to offset the high level of risk.

Who can provide active management support to administer their investment

Who invest principally in unquoted securities or securities which are accepted in other regulated market.

The venture capital industry has evolved operating procedures and contracting practices that are well adapted to environment characterized by uncertainty and information asymmetry between principles and agents. Venture capitalists are actively involved in the management of the venture they fund, typically becoming members of the board of directors and retaining important economic right in addition to their ownership right. The prevailing organizational form is the limited partnership, with venture capitalists acting as general partners and outside investors as limited partners.

Venture capital partnerships enter into contract with both the outside investor and the entrepreneurial venture. The contracts share certain characteristics:

Staging the commitment of capital and preserving the option to abandon.

Using compensation system directly linked to value creation

Preserving ways to force management to distribute investment proceeds

Venture capitalist invest at reasonably well-defined stages: seed investment, startup, first stage-early development, second stage-expansion, third stage-profit but cash poor, fourth stage-rapid growth toward liquidity point, bridge-mezzanine investment, liquidity stage-cash out or exit.

The seed stage typically precedes formation of a complete management team or completion of a product or service design. Each successive stage is generally tied to a significant development in the company such as pilot production, first profitability and finally an initial public.

Advantage of Private Equity over public equity financing

Private equity is available on a consistent basis, regard of the condition of public equity and debt market, and doesnĄ¯t come with burdensome and costly disclosure requirement, which can drain time and resource from management and give competitors a detailed look into a company's operation and finance.

Private equity investors typically are patient, long-term holders, are not concern about the direction of market psychology. Their most important concern is investing in solid companies with strong management, so they can generate high rate of return over a five to seven year time horizon. That's why private equity investors are always willing to invest, in economic expansion as well as downturn, in high and low interest rate and in both high growth and low growth industries. They are not beholden to daily market -to market policy and are flexible in structuring terms and conditions that allow a company to choose capital projects with long term paybacks.

Private equity investors tend to be value-added investors, in contrast to the fund managers who own vast amount of public equity and can turnover their portfolio five times a year. Private equity investor have a strong interest in working closely with management to add value by board representation, obtaining alternative source financing, monitoring operating performance and evaluating marketing plan etc.

A company seeking to raise equity publicly has to face the uncertainty surrounding the typical underwritten offering: it doesnĄ¯t know whether investor will positively receive the entire offering or how the offering will be priced until the end of this long process. However, since a company that access private equity has to deal with a single experienced investor, as opposed to many investors, it can educate the prospective investor in the long term investment merit of the company and potentially overcome any short-term market factors. Contrary to widespread opinion, private equity may be competitively priced relative to public equity. Private equity investors generally seek their returns through the long term appreciation of
exceptional company not through bargain purchases.

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