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By CoWin Investment, China. From the web. (Not endorsed.)
Private Equity Investment and Venture Capital Industry
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.