1.
Venture capital
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Venture capital firms or funds invest in these early-stage companies in exchange for equity–an ownership stake–in the companies they invest in. Venture capitalists take on the risk of financing risky start-ups in the hopes some of the firms they support will become successful. The start-ups are usually based on a technology or business model and they are usually from the high technology industries, such as information technology. The typical venture capital investment occurs after a seed funding round. The first round of venture capital to fund growth is called the Series A round. This institution helps identify promising new firms and provide them with finance, technical expertise, mentoring, marketing know-how, and business models. Once integrated into the network, these firms are more likely to succeed. However, venture capitalists decisions are often biased, exhibiting for instance overconfidence and illusion of control, a venture may be defined as a project prospective converted into a process with an adequate assumed risk and investment. With few exceptions, private equity in the first half of the 20th century was the domain of wealthy individuals, the Wallenbergs, Vanderbilts, Whitneys, Rockefellers, and Warburgs were notable investors in private companies in the first half of the century. In 1938, Laurance S. Rockefeller helped finance the creation of both Eastern Air Lines and Douglas Aircraft, and the Rockefeller family had vast holdings in a variety of companies. Eric M. Warburg founded E. M. Warburg & Co. in 1938, which would ultimately become Warburg Pincus, with investments in both leveraged buyouts and venture capital. The Wallenberg family started Investor AB in 1916 in Sweden and were early investors in several Swedish companies such as ABB, Atlas Copco, Ericsson, before World War II, money orders remained primarily the domain of wealthy individuals and families. Georges Doriot, the father of capitalism, founded INSEAD in 1957. Along with Ralph Flanders and Karl Compton, Doriot founded ARDC in 1946 to encourage investment in businesses run by soldiers returning from World War II. ARDC became the first institutional private-equity investment firm to raise capital from other than wealthy families. ARDC is credited with the first trick when its 1957 investment of $70,000 in Digital Equipment Corporation would be valued at over $355 million after the initial public offering in 1968. Former employees of ARDC went on to several prominent venture-capital firms including Greylock Partners and Morgan, Holland Ventures. ARDC continued investing until 1971, when Doriot retired, in 1972 Doriot merged ARDC with Textron after having invested in over 150 companies
2.
Cambridge, Massachusetts
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Cambridge is a city in Middlesex County, Massachusetts, and is a part of the Boston metropolitan area. According to the 2010 Census, the population was 105,162. As of July 2014, it was the fifth most populous city in the state, behind Boston, Worcester, Springfield, Cambridge was one of the two seats of Middlesex County prior to the abolition of county government in 1997, Lowell was the other. The site for what would become Cambridge was chosen in December 1630, because it was located safely upriver from Boston Harbor, Thomas Dudley, his daughter Anne Bradstreet, and her husband Simon, were among the first settlers of the town. The first houses were built in the spring of 1631, the settlement was initially referred to as the newe towne. Official Massachusetts records show the name capitalized as Newe Towne by 1632, the original village site is in the heart of todays Harvard Square. In the late 19th century, various schemes for annexing Cambridge itself to the city of Boston were pursued and rejected, in 1636, the Newe College was founded by the colony to train ministers. Newe Towne was chosen for the site of the college by the Great and General Court primarily—according to Cotton Mather—to be near the popular, in May 1638 the name of the settlement was changed to Cambridge in honor of the university in Cambridge, England. Hooker and Shepard, Newtownes ministers, and the colleges first president, major benefactor, in 1629, Winthrop had led the signing of the founding document of the city of Boston, which was known as the Cambridge Agreement, after the university. It was Governor Thomas Dudley who, in 1650, signed the charter creating the corporation which still governs Harvard College, Cambridge grew slowly as an agricultural village eight miles by road from Boston, the capital of the colony. By the American Revolution, most residents lived near the Common and Harvard College, with farms and estates comprising most of the town. Coming up from Virginia, George Washington took command of the volunteer American soldiers camped on Cambridge Common on July 3,1775, most of the Tory estates were confiscated after the Revolution. On January 24,1776, Henry Knox arrived with artillery captured from Fort Ticonderoga, a second bridge, the Canal Bridge, opened in 1809 alongside the new Middlesex Canal. The new bridges and roads made what were formerly estates and marshland into prime industrial and residential districts, in the mid-19th century, Cambridge was the center of a literary revolution when it gave the country a new identity through poetry and literature. Cambridge was home to some of the famous Fireside Poets—so called because their poems would often be read aloud by families in front of their evening fires, the Fireside Poets—Henry Wadsworth Longfellow, James Russell Lowell, and Oliver Wendell Holmes—were highly popular and influential in their day. Cambridge was incorporated as a city in 1846, the citys commercial center began to shift from Harvard Square to Central Square, which became the downtown of the city around this time. The coming of the railroad to North Cambridge and Northwest Cambridge then led to three changes in the city, the development of massive brickyards and brickworks between Massachusetts Ave. For many decades, the citys largest employer was the New England Glass Company, by the middle of the 19th century it was the largest and most modern glassworks in the world
3.
United States
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Forty-eight of the fifty states and the federal district are contiguous and located in North America between Canada and Mexico. The state of Alaska is in the northwest corner of North America, bordered by Canada to the east, the state of Hawaii is an archipelago in the mid-Pacific Ocean. The U. S. territories are scattered about the Pacific Ocean, the geography, climate and wildlife of the country are extremely diverse. At 3.8 million square miles and with over 324 million people, the United States is the worlds third- or fourth-largest country by area, third-largest by land area. It is one of the worlds most ethnically diverse and multicultural nations, paleo-Indians migrated from Asia to the North American mainland at least 15,000 years ago. European colonization began in the 16th century, the United States emerged from 13 British colonies along the East Coast. Numerous disputes between Great Britain and the following the Seven Years War led to the American Revolution. On July 4,1776, during the course of the American Revolutionary War, the war ended in 1783 with recognition of the independence of the United States by Great Britain, representing the first successful war of independence against a European power. The current constitution was adopted in 1788, after the Articles of Confederation, the first ten amendments, collectively named the Bill of Rights, were ratified in 1791 and designed to guarantee many fundamental civil liberties. During the second half of the 19th century, the American Civil War led to the end of slavery in the country. By the end of century, the United States extended into the Pacific Ocean. The Spanish–American War and World War I confirmed the status as a global military power. The end of the Cold War and the dissolution of the Soviet Union in 1991 left the United States as the sole superpower. The U. S. is a member of the United Nations, World Bank, International Monetary Fund, Organization of American States. The United States is a developed country, with the worlds largest economy by nominal GDP. It ranks highly in several measures of performance, including average wage, human development, per capita GDP. While the U. S. economy is considered post-industrial, characterized by the dominance of services and knowledge economy, the United States is a prominent political and cultural force internationally, and a leader in scientific research and technological innovations. In 1507, the German cartographer Martin Waldseemüller produced a map on which he named the lands of the Western Hemisphere America after the Italian explorer and cartographer Amerigo Vespucci
4.
Venture capital fund
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Venture capital firms or funds invest in these early-stage companies in exchange for equity–an ownership stake–in the companies they invest in. Venture capitalists take on the risk of financing risky start-ups in the hopes some of the firms they support will become successful. The start-ups are usually based on a technology or business model and they are usually from the high technology industries, such as information technology. The typical venture capital investment occurs after a seed funding round. The first round of venture capital to fund growth is called the Series A round. This institution helps identify promising new firms and provide them with finance, technical expertise, mentoring, marketing know-how, and business models. Once integrated into the network, these firms are more likely to succeed. However, venture capitalists decisions are often biased, exhibiting for instance overconfidence and illusion of control, a venture may be defined as a project prospective converted into a process with an adequate assumed risk and investment. With few exceptions, private equity in the first half of the 20th century was the domain of wealthy individuals, the Wallenbergs, Vanderbilts, Whitneys, Rockefellers, and Warburgs were notable investors in private companies in the first half of the century. In 1938, Laurance S. Rockefeller helped finance the creation of both Eastern Air Lines and Douglas Aircraft, and the Rockefeller family had vast holdings in a variety of companies. Eric M. Warburg founded E. M. Warburg & Co. in 1938, which would ultimately become Warburg Pincus, with investments in both leveraged buyouts and venture capital. The Wallenberg family started Investor AB in 1916 in Sweden and were early investors in several Swedish companies such as ABB, Atlas Copco, Ericsson, before World War II, money orders remained primarily the domain of wealthy individuals and families. Georges Doriot, the father of capitalism, founded INSEAD in 1957. Along with Ralph Flanders and Karl Compton, Doriot founded ARDC in 1946 to encourage investment in businesses run by soldiers returning from World War II. ARDC became the first institutional private-equity investment firm to raise capital from other than wealthy families. ARDC is credited with the first trick when its 1957 investment of $70,000 in Digital Equipment Corporation would be valued at over $355 million after the initial public offering in 1968. Former employees of ARDC went on to several prominent venture-capital firms including Greylock Partners and Morgan, Holland Ventures. ARDC continued investing until 1971, when Doriot retired, in 1972 Doriot merged ARDC with Textron after having invested in over 150 companies
5.
Assets under management
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Methods of calculating AUM vary between firms. The fee structure depends on the contract between each client and the firm or fund, Assets under management rise and fall. They may increase when investment performance is positive, or when new customers, rising AUM normally increases the fees which the firm generates. Conversely, AUM are reduced by negative investment performance, as well as redemptions or withdrawals, including fund closures, client defections, lower AUM tend to result in lower fees generated. Assets under management includes, Capital raised from investors, Capital belonging to the principals of the management firm. For example, if fund managers contribute $2B of their own capital to the fund and raise additional $10B from investors, net asset value Fund Management Activities Survey 2005 Sovereign Wealth Fund Assets Under Management
6.
Accomplice (company)
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Accomplice is one of the most active early stage firms in New England. A majority of Accomplice’s investments are in Boston, with others throughout the U. S. in Canada, Accomplice is headquartered in Cambridge, Massachusetts. Formerly known as Atlas Venture, the firm announced in October 2014 that it was splitting its technology, the technology group renamed as Accomplice, the life sciences group retained the name Atlas Venture. The technology group, then operating as FKA, crowdsourced its search for a new name in March 2015, “Accomplice” was chosen and the individual who pitched the name won a $25,000 investment in the new fund and $25,000 to donate to a TUGG nonprofit. Accomplice’s partners Jeff Fagnan and Ryan Moore have invested in over 180 companies, the Accomplice partners raised over $3.0 billion investor commitments across nine funds as part of Atlas Venture. In March 2015, Accomplice closed its tenth fund and its first under its new name with an oversubscribed $200 million tech-only fund, Accomplice Chris Lynch, Accomplice Partner, blog
7.
Life sciences
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While biology remains the centerpiece of the life sciences, technological advances in molecular biology and biotechnology have led to a burgeoning of specializations and interdisciplinary fields. Some life sciences focus on a type of life. For example, zoology is the study of animals, while botany is the study of plants, other life sciences focus on aspects common to all or many life forms, such as anatomy and genetics. Yet other fields are interested in technological advances involving living things, another major, though more specific, branch of life sciences involves understanding the mind – neuroscience. The life sciences are helpful in improving the quality and standard of life and they have applications in health, agriculture, medicine, and the pharmaceutical and food science industries. There is considerable overlap between many of the topics of study in the life sciences, biology – burst and eclectic field, composed of many branches and subdisciplines. However, despite the broad scope of biology, there are general and unifying concepts within it that govern all study and research, consolidating it into a single. In general, biology recognizes the cell as the unit of life, genes as the basic unit of heredity. It is also understood today that all organisms survive by consuming and transforming energy and by regulating their internal environment to maintain a stable, hematology – study of blood and blood-forming organs. Toxicology - study of the effects of chemicals on living organisms Zoology – study of animals, including classification, physiology, development, medicine – applied science or practice of the diagnosis, treatment, and prevention of disease. It encompasses a variety of care practices evolved to maintain and restore health by the prevention. Some of its branches are, Anesthesiology – branch of medicine that deals with life support, cardiology – branch of medicine that deals with disorders of the heart and the blood vessels. Critical care medicine – focuses on support and the intensive care of the seriously ill. Dermatology – branch of medicine that deals with the skin, its structure, functions, emergency medicine – focuses on care provided in the emergency department. Endocrinology – branch of medicine that deals with disorders of the endocrine system, gastroenterology – branch of medicine that deals with the study and care of the digestive system. General Practice is a branch of medicine that specializes in primary care, geriatrics – branch of medicine that deals with the general health and well-being of the elderly. Gynecology – branch of medicine that deals with the health of the reproductive systems. Hematology – branch of medicine that deals with the blood and the circulatory system, hepatology – branch of medicine that deals with the liver, gallbladder and the biliary system
8.
Startup company
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A startup is usually a company such as a small business, a partnership or an organization designed to rapidly develop a scalable business model. Startup companies can come in all forms and sizes, some of the critical tasks are to build a co-founder team to secure key skills, know-how, financial resources and other elements to conduct research on the target market. Typically, a startup will begin by building a first minimum viable product, in addition, startups founders do research to deepen their understanding of the ideas, technologies or business concepts and their commercial potential. Business models for startups are generally found via a bottom-up or top-down approach, given that startups operate in high-risk sectors, it can also be hard to attract investors to support the product/service development or attract buyers. The size and maturity of the startup ecosystem where the startup is launched, the startup ecosystem consists of the individuals, institutions and organizations business incubators and business accelerators and top-performing entrepreneurial firms and startups. A region with all of elements is considered to be a strong entrepreneurship ecosystem. Investors are generally most attracted to new companies distinguished by their strong co-founding team. Attractive startups generally have lower bootstrapping costs, higher risk, successful startups are typically more scalable than an established business, in the sense that the startup has the potential to grow rapidly with a limited investment of capital, labor or land. Startups have several options for funding, venture capital firms and angel investors may help startup companies begin operations, exchanging seed money for an equity stake in the firm. Venture capitalists and angel investors provide financing to a range of startups, with the expectation that a small number of the startups will become viable. Factoring is another option, though it is not unique to startups, startups usually need to form partnerships with other firms to enable their business model to operate. To become attractive to businesses, startups need to align their internal features, such as management style. In their 2013 study, Kask and Linton develop two ideal profiles, or also known as configurations or archetypes, for startups that are commercializing inventions, the inheritor profile calls for management style that is not too entrepreneurial and the startup should have an incremental invention. This profile is set out to be successful in a market that has a dominant design. In contrast to this profile is the originator which has a management style that is highly entrepreneurial and this profile is set out to be more successful in a market that does not have a dominant design. New startups should align themselves to one of the profiles when commercializing an invention to be able to find, by finding a business partner a startup will have greater chances to become successful. Startup founders often have a casual or offbeat attitude in their dress, office space and marketing. Startup founders in the 2010s may wear hoodies, sneakers and other clothes to business meetings
9.
Seattle
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Seattle is a seaport city on the west coast of the United States and the seat of King County, Washington. With an estimated 684,451 residents as of 2015, Seattle is the largest city in both the state of Washington and the Pacific Northwest region of North America. In July 2013, it was the major city in the United States. The city is situated on an isthmus between Puget Sound and Lake Washington, about 100 miles south of the Canada–United States border, a major gateway for trade with Asia, Seattle is the fourth-largest port in North America in terms of container handling as of 2015. The Seattle area was inhabited by Native Americans for at least 4,000 years before the first permanent European settlers. Arthur A. Denny and his group of travelers, subsequently known as the Denny Party, arrived from Illinois via Portland, the settlement was moved to the eastern shore of Elliott Bay and named Seattle in 1852, after Chief Siahl of the local Duwamish and Suquamish tribes. Logging was Seattles first major industry, but by the late-19th century, growth after World War II was partially due to the local Boeing company, which established Seattle as a center for aircraft manufacturing. The Seattle area developed as a technology center beginning in the 1980s, in 1994, Internet retailer Amazon was founded in Seattle. The stream of new software, biotechnology, and Internet companies led to an economic revival, Seattle has a noteworthy musical history. From 1918 to 1951, nearly two dozen jazz nightclubs existed along Jackson Street, from the current Chinatown/International District, to the Central District, the jazz scene developed the early careers of Ray Charles, Quincy Jones, Ernestine Anderson, and others. Seattle is also the birthplace of rock musician Jimi Hendrix and the alternative rock subgenre grunge, archaeological excavations suggest that Native Americans have inhabited the Seattle area for at least 4,000 years. By the time the first European settlers arrived, the people occupied at least seventeen villages in the areas around Elliott Bay, the first European to visit the Seattle area was George Vancouver, in May 1792 during his 1791–95 expedition to chart the Pacific Northwest. In 1851, a party led by Luther Collins made a location on land at the mouth of the Duwamish River. Thirteen days later, members of the Collins Party on the way to their claim passed three scouts of the Denny Party, members of the Denny Party claimed land on Alki Point on September 28,1851. The rest of the Denny Party set sail from Portland, Oregon, after a difficult winter, most of the Denny Party relocated across Elliott Bay and claimed land a second time at the site of present-day Pioneer Square, naming this new settlement Duwamps. For the next few years, New York Alki and Duwamps competed for dominance, david Swinson Doc Maynard, one of the founders of Duwamps, was the primary advocate to name the settlement after Chief Sealth of the Duwamish and Suquamish tribes. The name Seattle appears on official Washington Territory papers dated May 23,1853, in 1855, nominal land settlements were established. On January 14,1865, the Legislature of Territorial Washington incorporated the Town of Seattle with a board of managing the city
10.
Private equity
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In finance, private equity is a type of equity and one of the asset classes consisting of equity securities and debt in operating companies that are not publicly traded on a stock exchange. A private equity investment will generally be made by an equity firm. Bloomberg Businessweek has called private equity a rebranding of leveraged-buyout firms after the 1980s, common investment strategies in private equity include, leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital. In a typical leveraged-buyout transaction, a private-equity firm buys majority control of an existing or mature firm and this is distinct from a venture-capital or growth-capital investment, in which the investors invest in young, growing or emerging companies, and rarely obtain majority control. Private equity is often grouped into a broader category called private capital, generally used to describe capital supporting any long-term. The strategies private equity firms may use are as follows, leveraged buyout being the most important, the companies involved in these transactions are typically mature and generate operating cash flows. Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itself committing all the capital required for the acquisition, to do this, the financial sponsor will raise acquisition debt which ultimately looks to the cash flows of the acquisition target to make interest and principal payments. Acquisition debt in an LBO is often non-recourse to the sponsor and has no claim on other investments managed by the financial sponsor. Historically the debt portion of a LBO will range from 60%–90% of the purchase price, between 2000–2005 debt averaged between 59. 4% and 67. 9% of total purchase price for LBOs in the United States. A private equity fund say for example, ABC Capital II, to this it adds $2bn of equity – money from its own partners and from limited partners. With this $11bn it buys all the shares of an underperforming company and it replaces the senior management in XYZ Industrial, and they set out to streamline it. The workforce is reduced, some assets are sold off, etc, the objective is to increase the value of the company for an early sale. The stock market is experiencing a market, and XYZ Industrial is sold two years after the buy-out for $13bn, yielding a profit of $2bn. The original loan can now be paid off with interest of say $0. 5bn, the remaining profit of $1. 5bn is shared among the partners. Taxation of such gains is at capital gains rates, notes, The lenders can insure against default by syndicating the loan to spread the risk, or by buying credit default swaps or selling collateralised debt obligations from/to other institutions. Often the loan/equity is not paid off after sale but left on the books of the company for it to pay off over time and this can be advantageous since the interest is typically offsettable against the profits of the company, thus reducing, or even eliminating, tax. Most buyout deals are much smaller, the average purchase in 2013 was $89m. The target company does not have to be floated on the stockmarket, buy-out operations can go wrong and in such cases the loss is increased by leverage, just as the profit is if all goes well
11.
Growth capital
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Companies that seek growth capital will often do so in order to finance a transformational event in their lifecycle. Growth capital can also be used to effect a restructuring of a balance sheet. Growth capital resides at the intersection of private equity and venture capital, growth capital investments are also made by more traditional buyout firms. Particularly in markets where debt is available to finance leveraged buyouts or where competition to fund startup businesses is intense. Growth equity investments, as defined by the National Venture Capital Association, feature the following, company is cash flow positive, profitable or approaching profitability. Company may be founder-owned and often has no prior institutional investment, investor is agnostic about control and purchases minority ownership positions more often than not. Industry investment mix is similar to that of venture capital investors, Capital is used for company needs or shareholder liquidity and additional financing rounds are not usually expected until exit. Investments are unlevered or use light leverage at purchase, investment returns are primarily a function of growth, not leverage. Convertible bond Mezzanine debt Bridging the finance gap, next steps in improving access to capital for small businesses. Industry Canada Private equity and venture capital, the role of the venture capital provider. An overview of the venture capital industry
12.
Mezzanine capital
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In finance, mezzanine capital is any subordinated debt or preferred equity instrument that represents a claim on a companys assets which is senior only to that of the common shares. Mezzanine financings can be structured either as debt or preferred stock, mezzanine capital is often a more expensive financing source for a company than secured debt or senior debt. The higher cost of capital associated with mezzanine financings is the result of its being an unsecured, subordinated obligation in a capital structure. In compensation for the risk, mezzanine debt holders require a higher return for their investment than secured or more senior lenders. Mezzanine financings can be completed through a variety of different structures based on the objectives of the transaction. The basic forms used in most mezzanine financings are subordinated notes, the interest rate can be either fixed throughout the term of the loan or can fluctuate along with LIBOR or other base rates. PIK interest, Payable in kind interest is a form of payment in which the interest payment is not paid in cash. The ownership component in mezzanine securities is almost always accompanied by either cash interest or PIK interest, mezzanine lenders will also often charge an arrangement fee, payable upfront at the closing of the transaction. Arrangement fees contribute the least return, and their purposes are primarily to cover costs or as an incentive to complete the transaction. Because mezzanine lenders will seek a return of 14% to 20%, as a result, by using equity ownership and PIK interest, the mezzanine lender effectively defers its compensation until the due date of the security or a change of control of the company. Mezzanine financings can be made at either the company level or at the level of a holding company. This approach is taken most often as a result of the existing capital structure. In leveraged buyouts, mezzanine capital is used in conjunction with other securities to fund the purchase price of the company being acquired, typically, mezzanine capital will be used to fill a financing gap between less expensive forms of financing and equity. Often, a sponsor will exhaust other sources of capital before turning to mezzanine capital. Additionally, middle market companies may be unable to access the high yield market due to minimum size requirements, creating a need for flexible. In real estate finance, mezzanine loans are used by developers to secure supplementary financing for development projects. These sorts of mezzanine loans are secured by a second ranking real property mortgage
13.
Private equity secondary market
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In finance, the private equity secondary market refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds. Given the absence of established trading markets for these interests, the transfer of interests in private equity funds as well as hedge funds can be more complex, sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds. For the vast majority of private equity investments, there is no listed public market, however, there is a robust, buyers seek to acquire private equity interests in the secondary market for multiple reasons. For example, the duration of the investment may be shorter than an investment in the private equity fund initially. Likewise, the buyer may be able to acquire these interests at an attractive price, finally, the buyer can evaluate the funds holdings before deciding to purchase an interest in the fund. The private equity secondary market features dozens of dedicated firms and institutional investors that engage in the purchase, such large volumes have been fuelled by an increasing number of players over the years, which ultimately led to what today has become a highly competitive and fragmented market. Additionally, major investment banking firms including Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, other institutional investors typically have appetites for secondary interests. More and more investors, whether private equity funds-of-funds or other institutional investors. Other niches within the market include purchases of interests in fund-of-funds and secondary funds, purchases of interests in real estate funds. As the private equity secondary market matures, non-traditional secondary strategies are emerging, since 2008, there have been a growing number of new entrants into the secondary transaction space, hoping to capitalize on what is perceived to be a growing market opportunity. Nearly all types of private equity funds can be sold in the secondary market, the transfer of the fund interest typically will allow the investor to receive some liquidity for the funded investments as well as a release from any remaining unfunded obligations to the fund. Typically, the buyer and seller agree on an arrangement that is more complex than a simple transfer of 100% ownership of the fund interest. Securitization — An investor contributes its fund interests into a new vehicle which in turn issues notes and generates partial liquidity for the seller, typically, the investor will also sell a portion of the equity in the leveraged vehicle. Also referred to as a collateralized fund obligation vehicle, stapled transactions — Occurs when a private equity firm is raising a new fund. A secondary buyer purchases an interest in a fund from a current investor. These transactions are initiated by private equity firms during the fundraising process. They had become less and less frequent during 2008 and 2009 as the appetite for primary investments shrunk, since 2009, a limited number of spinout transactions have been completed involving captive teams within financial institutions. Secondary directs or synthetic secondaries – This category is the sale of portfolios of investments in operating companies
14.
Leveraged buyout
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The use of debt, which has a lower cost of capital than equity, serves to reduce the overall cost of financing the acquisition. This reduced cost of financing allows greater gains to accrue to the equity, and, as a result, the term LBO is usually employed when a financial sponsor acquires a company. However, many transactions are partially funded by bank debt. LBOs mostly occur in private companies, but can also be employed with public companies, as financial sponsors increase their returns by employing a very high leverage, they have an incentive to employ as much debt as possible to finance an acquisition. In situations of normal companies with normal business risks, debt of 40–60% of the price are usual figures. The possible debt ratios vary significantly among the regions and the target industries, depending on the size and purchase price of the acquisition, the debt is provided in different tranches. Depending on the size of the acquisition, debt as well as equity can be provided by more than one party. Another form of debt that is used in LBOs are seller notes in which the seller effectively uses parts of the proceeds of the sale to grant a loan to the purchaser, such seller notes are often employed in management buyouts or in situations with very restrictive bank financing environments. Note that in close to all cases of LBOs, the only available for the debt are the assets. The financial sponsor can treat their investment as common equity or preferred equity among other types of securities, preferred equity can pay a dividend and has payment preferences to common equity. Junior debt often additionally has warrants and its interest is often all or partly of PIK nature, so mature companies with long-term customer contracts and/or relatively predictable cost structures are commonly acquired in LBOs. Relatively low fixed costs - Fixed costs create substantial risk for Private Equity firms because companies still have to pay them if their revenues decline. The first leveraged buyout may have been the purchase by McLean Industries, Inc. of Pan-Atlantic Steamship Company in January 1955, under the terms of that transaction, McLean borrowed $42 million and raised an additional $7 million through an issue of preferred stock. When the deal closed, $20 million of Waterman cash and assets were used to retire $20 million of the loan debt, in fact, it is Posner who is often credited with coining the term leveraged buyout or LBO. The leveraged buyout boom of the 1980s was conceived in the 1960s by a number of financiers, most notably Jerome Kohlberg, Jr. Working for Bear Stearns at the time, Kohlberg and Kravis, along with Kravis cousin George Roberts, began a series of what they described as bootstrap investments. Many of the target companies lacked a viable or attractive exit for their founders, as they were too small to be taken public, thus a sale to a buyer might prove attractive. Their acquisition of Orkin Exterminating Company in 1964 is among the first significant leveraged buyout transactions, by 1976, tensions had built up between Bear Stearns and Kohlberg, Kravis and Roberts leading to their departure and the formation of Kohlberg Kravis Roberts in that year
15.
History of private equity and venture capital
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The history of private equity and venture capital and the development of these asset classes has occurred through a series of boom and bust cycles since the middle of the 20th century. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel, although interrelated tracks, since the origins of the modern private equity industry in 1946, there have been four major epochs marked by three boom and bust cycles. The second boom and bust cycle emerged from the ashes of the savings and loan crisis, the insider trading scandals, the real estate market collapse and this period saw the emergence of more institutionalized private equity firms, ultimately culminating in the massive Dot-com bubble in 1999 and 2000. With the second private equity boom in the mid-1990s and liberalization of regulation for institutional investors in Europe, Investors have been acquiring businesses and making minority investments in privately held companies since the dawn of the industrial revolution. Later, J. Pierpont Morgans J. P. Morgan & Co. would finance railroads, as late as the 1980s, Lester Thurow, a noted economist, decried the inability of the financial regulation framework in the United States to support merchant banks. US investment banks were confined primarily to businesses, handling mergers and acquisitions transactions and placements of equity. Investment banks would later enter the space, however long after independent firms had become well established, with few exceptions, private equity in the first half of the 20th century was the domain of wealthy individuals and families. The Vanderbilts, Whitneys, Rockefellers and Warburgs were notable investors in private companies in the first half of the century. In 1938, Laurance S. Rockefeller helped finance the creation of both Eastern Air Lines and Douglas Aircraft and the Rockefeller family had vast holdings in a variety of companies. Eric M. Warburg founded E. M. Warburg & Co. in 1938, former employees of ARDC went on to found several prominent venture capital firms including Greylock Partners and Morgan, Holland Ventures, the predecessor of Flagship Ventures. ARDC continued investing until 1971 with the retirement of Doriot, in 1972, Doriot merged ARDC with Textron after having invested in over 150 companies. J. H. Whitney & Company was founded by John Hay Whitney, Whitney had been investing since the 1930s, founding Pioneer Pictures in 1933 and acquiring a 15% interest in Technicolor Corporation with his cousin Cornelius Vanderbilt Whitney. By far, Whitneys most famous investment was in Florida Foods Corporation, the company, having developed an innovative method for delivering nutrition to American soldiers, later came to be known as Minute Maid orange juice and was sold to The Coca-Cola Company in 1960. J. H. Whitney & Company continues to make investments in leveraged buyout transactions, before World War II, venture capital investments were primarily the domain of wealthy individuals and families. One of the first steps toward a professionally managed venture capital industry was the passage of the Small Business Investment Act of 1958, the 1958 Act officially allowed the U. S. Small Business Administration to license private Small Business Investment Companies to help the financing, additionally, it was thought that fostering entrepreneurial companies would spur technological advances to compete against the Soviet Union. Facilitating the flow of capital through the economy up to the pioneering small concerns in order to stimulate the U. S. economy was, in 2005, the SBA significantly reduced its SBIC program, though SBICs continue to make private equity investments. The real growth in Private Equity surged in 1984 to 1991 period when Institutional Investors, more often than not, these companies were exploiting breakthroughs in electronic, medical or data-processing technology
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Early history of private equity
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The early history of private equity relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel although interrelated tracks, the origins of the modern private equity industry trace back to 1946 with the formation of the first venture capital firms. Investors have been acquiring businesses and making minority investments in privately held companies since the dawn of the industrial revolution, later, J. Pierpont Morgans J. P. Morgan & Co. would finance railroads and other industrial companies throughout the United States. As late as the 1980s, Lester Thurow, a noted economist, US investment banks were confined primarily to advisory businesses, handling mergers and acquisitions transactions and placements of equity and debt securities. Investment banks would later enter the space, however long after independent firms had become well established, with few exceptions, private equity in the first half of the 20th century was the domain of wealthy individuals and families. The Vanderbilts, Whitneys, Rockefellers and Warburgs were notable investors in private companies in the first half of the century. In 1938, Laurance S. Rockefeller helped finance the creation of both Eastern Air Lines and Douglas Aircraft and the Rockefeller family had vast holdings in a variety of companies. Eric M. Warburg founded E. M. Warburg & Co. in 1938, former employees of ARDC went on to found several prominent venture capital firms including Greylock Partners and Morgan, Holland Ventures, the predecessor of Flagship Ventures. ARDC continued investing until 1971 with the retirement of Doriot, in 1972, Doriot merged ARDC with Textron after having invested in over 150 companies. J. H. Whitney & Company was founded by John Hay Whitney, Whitney had been investing since the 1930s, founding Pioneer Pictures in 1933 and acquiring a 15% interest in Technicolor Corporation with his cousin Cornelius Vanderbilt Whitney. By far, Whitneys most famous investment was in Florida Foods Corporation, the company, having developed an innovative method for delivering nutrition to American soldiers, later came to be known as Minute Maid orange juice and was sold to The Coca-Cola Company in 1960. J. H. Whitney & Company continues to make investments in leveraged buyout transactions, before World War II, venture capital investments were primarily the domain of wealthy individuals and families. One of the first steps toward a professionally managed venture capital industry was the passage of the Small Business Investment Act of 1958, the 1958 Act officially allowed the U. S. Small Business Administration to license private Small Business Investment Companies to help the financing, additionally, it was thought that fostering entrepreneurial companies would spur technological advances to compete against the Soviet Union. Facilitating the flow of capital through the economy up to the pioneering small concerns in order to stimulate the U. S. economy was, in 2005, the SBA significantly reduced its SBIC program, though SBICs continue to make private equity investments. During the 1960s and 1970s, venture capital firms focused their investment activity primarily on starting and expanding companies, more often than not, these companies were exploiting breakthroughs in electronic, medical or data-processing technology. As a result, venture capital came to be almost synonymous with technology finance and it is commonly noted that the first venture-backed startup was Fairchild Semiconductor, funded in 1959 by what would later become Venrock Associates. Venrock was founded in 1969 by Laurance S. Rockefeller, the fourth of John D. Rockefellers six children as a way to allow other Rockefeller children to develop exposure to venture capital investments
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Private equity in the 1980s
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Private equity in the 1980s relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel although interrelated tracks. The development of the equity and venture capital asset classes has occurred through a series of boom. The 1980s saw the first major boom and bust cycle in private equity, the purchase price for Gibson was $80 million, of which only $1 million was rumored to have been contributed by the investors. By mid-1983, just sixteen months after the deal, Gibson completed a $290 million IPO. Simon and Wesray would later complete the $71.6 million acquisition of Atlas Van Lines, the success of the Gibson Greetings investment attracted the attention of the wider media to the nascent boom in leveraged buyouts. Wometco Enterprises,1984 KKR completed the first billion-dollar buyout transaction to acquire the company with interests in television, movie theaters. The buyout comprised the acquisition of 100% of the shares for $842 million. Beatrice Companies,1985 KKR sponsored the $6.1 billion management buyout of Beatrice, at the time of its closing in 1985, Beatrice was the largest buyout completed. Sterling Jewelers,1985 One of Thomas H. Lees early successes was the acquisition of Akron, lee reported put in less than $3 million and when the company was sold two years later for $210 million walked away with over $180 million in profits. The combined company was a predecessor to what is now Signet Group. Revco Drug Stores,1986 The drug store chain was taken private in a management buyout transaction, however, within two years the company was unable to support its debt load and filed for bankruptcy protection. Bondholders in the Revco buyout ultimately contended that the buyout was so constructed that the transaction should have been unwound. Safeway,1986 KKR completed a friendly $5.5 billion buyout of supermarket operator, Safeway, Safeway was taken public again in 1990. Southland Corporation,1987 John Thompson, the founder of convenience store operator 7-Eleven, Jim Walter Corp,1987 KKR acquired the company for $3.3 billion in early 1988 but faced issues with the buyout almost immediately. Most notably, a subsidiary of Jim Walter Corp faced a large asbestos lawsuit, in 1989, the holding company that KKR used for the Jim Walter buyout filed for Chapter 11 bankruptcy protection. BlackRock,1988 Blackstone Group began the buildup of BlackRock. Blackstone sold its interest in 1994 and today BlackRock is listed on the New York Stock Exchange, Federated Department Stores,1988 Robert Campeaus Campeau Corporation completed a $6.6 billion merger with Federated, owner of the Bloomingdales, Filenes and Abraham & Straus department stores
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Private equity in the 1990s
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Private equity in the 1990s relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel although interrelated tracks. The development of the equity and venture capital asset classes has occurred through a series of boom. This period saw the emergence of more institutionalized private equity firms, additionally, the RJR Nabisco deal was showing signs of strain, leading to a recapitalization in 1990 that involved the contribution of $1.7 billion of new equity from KKR. Drexel Burnham Lambert was the investment bank most responsible for the boom in private equity during the 1980s due to its leadership in the issuance of high-yield debt. The firm was first rocked by scandal on May 12,1986, when Dennis Levine, Levine pleaded guilty to four felonies, and implicated one of his recent partners, arbitrageur Ivan Boesky. Largely based on information Boesky promised to provide about his dealings with Michael Milken, two days later, Rudy Giuliani, the United States Attorney for the Southern District of New York, launched his own investigation. For two years, Drexel steadfastly denied any wrongdoing, claiming that the criminal and SEC cases were based almost entirely on the statements of an admitted felon looking to reduce his sentence. However, it was not enough to keep the SEC from suing Drexel in September 1988 for insider trading, stock manipulation, defrauding its clients, all of the transactions involved Milken and his department. Giuliani began seriously considering indicting Drexel under the powerful Racketeer Influenced and Corrupt Organizations Act, under the doctrine that companies are responsible for an employees crimes. The threat of a RICO indictment, which would have required the firm to put up a bond of as much as $1 billion in lieu of having its assets frozen. Most of Drexels capital was borrowed money, as is common with most investment banks, Drexels CEO, Fred Joseph said that he had been told that if Drexel were indicted under RICO, it would only survive a month at most. It also agreed to pay a fine of $650 million – at the time, Milken left the firm after his own indictment in March 1989. Effectively, Drexel was now a convicted felon, in April 1989, Drexel settled with the SEC, agreeing to stricter safeguards on its oversight procedures. Later that month, the firm eliminated 5,000 jobs by shuttering three departments – including the retail brokerage operation, meanwhile, the high-yield debt markets had begun to shut down in 1989, a slowdown that accelerated into 1990. In the 1980s, the boom in private equity transactions, specifically leveraged buyouts, was driven by the availability of financing, particularly high-yield debt, the collapse of the high yield market in 1989 and 1990 would signal the end of the LBO boom. At that time, many observers were pronouncing the junk bond market “finished. ”This collapse would be due largely to three factors, The collapse of Drexel Burnham Lambert, the foremost underwriter of junk bonds. The dramatic increase in default rates among junk bond issuing companies, the historical default rate for high yield bonds from 1978 to 1988 was approximately 2. 2% of total issuance
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Private equity in the 2000s
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Private equity in the 2000s relates to one of the major periods in the history of private equity and venture capital. Within the broader private equity industry, two distinct sub-industries, leveraged buyouts and venture capital experienced growth along parallel although interrelated tracks. The development of the equity and venture capital asset classes has occurred through a series of boom. As the 20th century ended, so, too, did the dot-com bubble, the Nasdaq crash and technology slump that started in March 2000 shook virtually the entire venture capital industry as valuations for startup technology companies collapsed. Over the next two years, many firms had been forced to write-off large proportions of their investments. By mid-2003, the venture capital industry had shriveled to about half its 2001 capacity, nevertheless, PricewaterhouseCoopers MoneyTree Survey shows that total venture capital investments held steady at 2003 levels through the second quarter of 2005. As a percentage of GDP, venture investment was 0. 058% percent in 1994, peaked at 1. 087% in 2000, the revival of an Internet-driven environment have helped to revive the venture capital environment. However, as a percentage of the private equity market, venture capital has still not reached its mid-1990s level. Meanwhile, as the venture collapsed, the activity in the leveraged buyout market also declined significantly. Leveraged buyout firms had invested heavily in the sector from 1996 to 2000. In that year at least 27 major telecommunications companies, filed for bankruptcy protection, telecommunications, which made up a large portion of the overall high yield universe of issuers, dragged down the entire high yield market. Overall corporate default rates surged to levels unseen since the 1990 market collapse rising to 6. 3% of high yield issuance in 2000 and 8. 9% of issuance in 2001, default rates on junk bonds peaked at 10.7 percent in January 2002 according to Moodys. As a result, leveraged buyout activity ground to a halt, the major collapses of former high-fliers including WorldCom, Adelphia Communications, Global Crossing and Winstar Communications were among the most notable defaults in the market. In addition to the rate of default, many investors lamented the low recovery rates achieved through restructuring or bankruptcy. These firms were often cited as the highest profile private equity casualties, having invested heavily in technology, similarly, Forstmann suffered major losses from investments in McLeodUSA and XO Communications. Tom Hicks resigned from Hicks Muse at the end of 2004, deals completed during this period tended to be smaller and financed less with high yield debt than in other periods. Private equity firms had to cobble together financing made up of loans and mezzanine debt. Private equity firms benefited from the valuation multiples
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Crowdfunding
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Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people. Crowdfunding is a form of crowdsourcing and of alternative finance, in 2015, it was estimated that worldwide over US$34 billion was raised this way. Although the concept can also be executed through mail-order subscriptions, benefit events, Crowdfunding has a long history with several roots. Books have been crowdfunded for centuries, Authors and publishers would advertise book projects in praenumeration or subscription schemes, the book would be written and published if enough subscribers signaled their readiness to buy the book once it was out. The subscription business model is not exactly crowdfunding, since the flow of money only begins with the arrival of the product. The list of subscribers has, though, the power to create the necessary confidence among investors that is needed to risk the publication, war bonds are theoretically a form of crowdfunding military conflicts. A clearer case of modern crowdfunding is Auguste Comtes scheme to issue notes for the support of his further work as a philosopher. The Premiere Circulaire Annuelle adressée par l’auteur du Systeme de Philosophie Positive was published on 14 March 1850, the cooperative movement of the 19th and 20th centuries is a broader precursor. In 1885, when government sources failed to provide funding to build a base for the Statue of Liberty. Crowdfunding on the internet first gained popular and mainstream use in the arts and they subsequently used this method to fund their studio albums. In the film industry, independent writer/director Mark Tapio Kines designed a website in 1997 for his then-unfinished first feature film Foreign Correspondents. By early 1999, he had raised more than US$125,000 on the Internet from at least 25 fans, in 2002, the Free Blender campaign was an early software crowdfunding precursor. The campaign aimed for open-sourcing the Blender 3D computer graphics software by collecting $100,000 from the community while offering additional benefits for donating members, Crowdfunding gained traction after the launch of ArtistShare, in 2003. Following ArtistShare, more crowdfunding sites started to appear on the web such as IndieGoGo, Kickstarter, however, Sellaband, started in 2006 as a music-focused platform, initially controlled the crowdfunding market. This can be contributed to creators and funders, who perceive the platform to be more valuable with more members, later, Kickstarter gained popularity for its wide-ranging focus. However, Sellaband offered revenue sharing, a type of equity crowdfunding and it was later controlled by a German company and heightened security restrictions. The phenomenon of crowdfunding is older than the term crowdfunding, according to wordspy. com, the earliest recorded use of the word was in August 2006. Equity crowdfunding, the backer receives shares of a company, usually in its early stages, reward-based crowdfunding has been used for a wide range of purposes, including motion picture promotion, free software development, inventions development, scientific research, and civic projects
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Family office
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The term family office can refer to a family controlled investment group, and also the two major terms, single family office or Multi-family office. The distinction is important since, despite the names, each provides a significantly different service. This article refers principally to single family offices, which are the predominant forms of family offices today, an SFO is a private company that manages investments and trusts for a single family. The companys financial capital is the familys own wealth, often accumulated over many family generations, traditional family offices provide personal services such as managing household staff and making travel arrangements. Other services typically handled by the family office include property management, day-to-day accounting and payroll activities. Family offices often provide family management services, which includes family governance, financial and investment education, philanthropy coordination, a family office can cost over $1 million a year to operate, so the familys net worth usually exceeds $100 million. Recently, some family offices have accepted non-family members, more recently the term family office or multi family office is used to refer primarily to financial services for relatively wealthy families. According to the New York Times the Rockefellers first pioneered family offices in the late 19th century, Family offices started gaining popularity in the 1980s, and since 2005, as the ranks of the super-rich grew to record proportions family offices swelled proportionately. A traditional single family office is a run by and for a single family. Its sole function is to centralize the management of a significant family fortune, typically, these organizations employ staff to manage investments, taxes, philanthropic activities, trusts, and legal matters. The purpose of the office is to effectively transfer established wealth across generations. The family office invests the money, manages all of the familys assets. The Family Office Council, the group for single family offices, defines a single family office as An SFO is a private organisation that manages the investments for a single wealthy family. The assets are the family’s own wealth, often accumulated over many family generations, in addition to investment management some Family Offices provide personal services such as managing household staff and making travel arrangements. Other services typically handled by the traditional Family Office include property management, day-to-day accounting and payroll activities, Family Offices often provide family management services, which includes family governance, financial and investment education, philanthropy coordination, and succession planning. The office itself either is, or operates just like, a corporation, with a president, CFO, CIO, etc. the officers are compensated per their arrangement with the family, usually with overrides based on the profits or capital gains generated by the office. Often, family offices are built around core assets that are professionally managed, as profits are created, assets are deployed into investments. Many family offices turn to hedge funds for alignment of interest based on risk, some family offices remain passive and just allocate funds to outside managers
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Financial endowment
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A financial endowment is a donation of money or property to a nonprofit organization for the ongoing support of that organization. An endowment may come with stipulations regarding its usage, the total value of an institutions investments is often referred to as the institutions endowment and is typically organized as a public charity, private foundation, or trust. Among the institutions that commonly manage endowments are academic institutions, cultural institutions, service organizations, the earliest endowed chairs were those established by the Roman emperor and Stoic philosopher Marcus Aurelius in Athens in AD176. Aurelius created one endowed chair for each of the schools of philosophy, Platonism, Aristotelianism, Stoicism. Later, similar endowments were set up in other major cities of the Empire. Today, the University of Glasgow has fifteen Regius Professorships, private individuals soon adopted the practice of endowing professorships. Isaac Newton held the Lucasian Chair of Mathematics at Cambridge beginning in 1669, unrestricted endowment can be used in any way the recipient chooses to carry out its mission. Term endowment funds stipulate that all or part of the principal may be expended only after the expiration of a period of time or occurrence of a specified event. Quasi endowment funds must retain the purpose and intent as specified by the donor or source of the original funds, Endowment revenue can be restricted by donors to serve many purposes. Endowed professorships or scholarships restricted to a subject are common. Ignoring the restriction is called invading the endowment, but change of circumstance or financial duress like bankruptcy can preclude carrying out the donors intent. A court can alter the use of restricted endowment under a doctrine called cy-près meaning to find an alternative as near as possible to the donors intent, the restricted/unrestricted distinction focuses on the use of the funds, see quasi-endowment below for a distinction about whether principal can be spent. Academic institutions, such as colleges and universities, will control a endowment fund that finances a portion of the operating or capital requirements of the institution. In addition to an endowment fund, each university may also control a number of restricted endowments that are intended to fund specific areas within the institution. The most common examples are endowed professorships, and endowed scholarships or fellowships, in the United States, the endowment is often integral to the financial health of educational institutions. Alumni or friends of institutions sometimes contribute capital to the endowment, the endowment funding culture is strong in the United States and Canada but less pronounced overseas, with the exceptions of Cambridge and Oxford universities. Endowment funds have also created to support secondary and elementary school districts in several states in the United States. An endowed professorship is a position permanently paid for with the revenue from an endowment fund set up for that purpose
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Fund of funds
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A fund of funds is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. This type of investing is often referred to as multi-manager investment, a fund of funds may be fettered, meaning that it invests only in funds managed by the same investment company, or unfettered, meaning that it can invest in external funds run by other managers. The original Fund of Funds was created by Bernie Cornfeld in 1962 and it went bankrupt after being looted by Robert Vesco. Investing in an investment scheme may increase diversity compared with a small investor holding a smaller range of securities directly. Investing in a fund of funds may achieve greater diversification, according to modern portfolio theory, the benefit of diversification can be the reduction of volatility while maintaining average returns. However, this is countered by the fees paid both at FOF level and at the level of the underlying investment fund. Management fees for FOFs are typically higher than those on traditional investment funds because they include the management fees charged by the underlying funds, after allocation of the levels of fees payable and taxation, returns on FOF investments will generally be lower than what single-manager funds can yield. The due diligence and safety of investing in FOFs has come under question as a result of the Bernie Madoff scandal and it became clear that a motivation for this was the lack of fees by Madoff, which gave the illusion that the FOF was performing well. The due diligence of the FOFs apparently did not include asking why Madoff was not making this charge for his services and these strategic and structural issues have caused fund-of-funds to become less and less popular. The FOF structure may be useful for asset-allocation funds, that is, for example, iShares has asset-allocation ETFs, which own other iShares ETFs. Similarly, Vanguard has asset-allocation mutual funds, which own other Vanguard mutual funds, the parent funds may own the same child funds, with different proportions to allow for aggressive to conservative allocation. This structure simplifies management by separating allocation from security selection, a target-date fund is similar to an asset-allocation fund, except that the allocation is designed to change over time. The same structure is useful here, iShares has target-date ETFs that own other iShares ETFs, Vanguard has target-date mutual funds that own other Vanguard mutual funds. In both cases, the funds are used as the asset-allocation funds. Since a provider may have many target dates, this can reduce duplication of work. According to Preqin, in 2006, funds investing in private equity funds amounted to 14% of all committed capital in the private equity market. Funds of hedge funds select hedge fund managers and construct portfolios based upon those selections, the fund of hedge funds is responsible for hiring and firing the managers in the fund. Some funds of hedge funds might have only one hedge fund in them, Funds of hedge funds generally charge a fee for their services, always in addition to the hedge funds management and performance fees, which can be 1. 5% and 15-30%, respectively
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Institutional investor
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Institutional investor is a term for entities which pool money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include banks, insurance companies, pensions, hedge funds, REITs, investment advisors, endowments, operating companies which invest excess capital in these types of assets may also be included in the term. Activist institutional investors may also influence corporate governance by exercising voting rights in their investments, in some African colonies in particular, part of the citys entertainment was financed by the revenue generated by shops and baking-ovens originally offered by a wealthy benefactor. In the South of Gaul, aqueducts were sometimes financed in a similar fashion, the legal principle of juristic person might have appeared with the rise of monasteries in the early centuries of Christianity. The concept then might have been adopted by the emerging Islamic law, the waqf became a cornerstone of the financing of education, waterworks, welfare and even the construction of monuments. Alongside some Christian monasteries the waqfs created in the 10th century AD are amongst the longest standing charities in the world, following the spread of monasteries, almhouses and other hospitals, donating sometimes large sums of money to institutions became a common practice in medieval Western Europe. In the process, over the centuries those institutions acquired sizable estates, following the collapse of the agrarian revenues, many of these institution moved away from rural real estate to concentrate on bonds emitted by the local sovereign. The importance of lay and religious institutional ownership in the pre-industrial European economy cannot be overstated, following several waves of dissolution the weight of the traditional charities in the economy collapsed, by 1800, institutions solely owned 2% of the arable land in England and Wales. Because of their sophistication, institutional investors may be exempt from certain securities laws, for example, in the United States, institutional investors are generally eligible to purchase private placements under Rule 506 of Regulation D as accredited investors. Further, large US institutional investors may qualify to purchase certain securities generally restricted from retail investment under Rule 144A, as intermediaries between individual investors and companies, institutional investors are important sources of capital in financial markets. By pooling constituents investments, institutional investors arguably reduce the cost of capital for entrepreneurs while diversifying constituents portfolios and their greater ability to influence corporate behaviour as well to select investors profiles may help diminish agency costs. Institutional investors investment horizons differ, but do not share the life cycle as human beings. Unlike individuals, they do not have a phase of accumulation followed by one of consumption, others like pension funds can predict long ahead when they will have to repay their investors allowing them to invest in less liquid assets such as private equities, hedge funds or commodities. Finally, other institutions have an extended investment horizon, allowing them to invest in assets as they are unlikely to be forced to sell them before term. And schools When considered from a strictly local standpoint, institutional investors are sometimes called foreign institutional investors and this expression is mostly used in emerging markets such as China, Malaysia and India. In various countries different types of institutional investors may be more important, in oil-exporting countries sovereign wealth funds are very important, while in developed countries, pension funds may be more important. Japan is home to the worlds largest pension fund and is home to 63 of the top 300 pension funds worldwide and their wealth accounts for around two thirds of the equity in public listed companies. For any given company, the largest 25 investors would have to be able to muster over half of the votes.3 December 2008 BS Black and JC Coffee, PL Davies, Institutional investors in the United Kingdom in T Baums et al
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Insurance
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Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of a contingent, an entity which provides insurance is known as an insurer, insurance company, or insurance carrier. A person or entity who buys insurance is known as an insured or policyholder, the insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. The amount of money charged by the insurer to the insured for the coverage set forth in the policy is called the premium. If the insured experiences a loss which is covered by the insurance policy. Methods for transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessels capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c.1750 BC, and practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the guarantee to cancel the loan should the shipment be stolen. At some point in the 1st millennium BC, the inhabitants of Rhodes created the general average and this allowed groups of merchants to pay to insure their goods being shipped together. The collected premiums would be used to any merchant whose goods were jettisoned during transport. Separate insurance contracts were invented in Genoa in the 14th century, the first known insurance contract dates from Genoa in 1347, and in the next century maritime insurance developed widely and premiums were intuitively varied with risks. These new insurance contracts allowed insurance to be separated from investment, Insurance became far more sophisticated in Enlightenment era Europe, and specialized varieties developed. Property insurance as we know it today can be traced to the Great Fire of London, initially,5,000 homes were insured by his Insurance Office. At the same time, the first insurance schemes for the underwriting of business ventures became available, by the end of the seventeenth century, Londons growing importance as a center for trade was increasing demand for marine insurance. These informal beginnings led to the establishment of the insurance market Lloyds of London and several related shipping, the first life insurance policies were taken out in the early 18th century. The first company to offer life insurance was the Amicable Society for a Perpetual Assurance Office, founded in London in 1706 by William Talbot, edward Rowe Mores established the Society for Equitable Assurances on Lives and Survivorship in 1762. In the late 19th century, accident insurance began to become available and this operated much like modern disability insurance. The first company to offer accident insurance was the Railway Passengers Assurance Company, by the late 19th century, governments began to initiate national insurance programs against sickness and old age
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Investment bank
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Unlike commercial banks and retail banks, investment banks do not take deposits. From the passage of Glass–Steagall Act in 1933 until its repeal in 1999 by the Gramm–Leach–Bliley Act, Other industrialized countries, including G7 countries, have historically not maintained such a separation. As part of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, the two main lines of business in investment banking are called the sell side and the buy side. The sell side involves trading securities for cash or for other securities, the buy side involves the provision of advice to institutions that buy investment services. Private equity funds, mutual funds, life insurance companies, unit trusts, an investment bank can also be split into private and public functions with a Chinese wall separating the two to prevent information from crossing. The private areas of the deal with private insider information that may not be publicly disclosed, while the public areas, such as stock analysis. The first company to publicly traded stock was the Dutch East India Company. Investment banking has changed over the years, beginning as a form focused on underwriting security issuance. In the United States, commercial banking and investment banking were separated by the Glass–Steagall Act, the repeal led to more universal banks offering an even greater range of services. Many large commercial banks have therefore developed investment banking divisions through acquisitions, notable large banks with significant investment banks include JPMorgan Chase, Bank of America, Credit Suisse, Deutsche Bank, UBS, Barclays, and Wells Fargo. The traditional service of underwriting security issues has declined as a percentage of revenue, as far back as 1960, 70% of Merrill Lynchs revenue was derived from transaction commissions while traditional investment banking services accounted for 5%. However, Merrill Lynch was a relatively retail-focused firm with a large brokerage network, investment banking is split into front office, middle office, and back office activities. Investment banks offer services to corporations issuing securities and investors buying securities. For corporations, investment bankers offer information on when and how to place their securities on the open market, therefore, investment bankers play a very important role in issuing new security offerings. Front office is described as a revenue generating role. Markets is divided into sales and trading, and research, a pitch book of financial information is generated to market the bank to a potential M&A client, if the pitch is successful, the bank arranges the deal for the client. The investment banking division is divided into industry coverage and product coverage groups. On behalf of the bank and its clients, an investment banks primary function is buying and selling products
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Merchant bank
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A merchant bank is a financial institution providing capital to companies in the form of share ownership instead of loans. A merchant bank also provides advisory on corporate matters to the firms in which they invest, in the United Kingdom, the historical term merchant bank refers to an investment bank. Both commercial banks and investment banks may engage in merchant banking activities, historically, merchant banks original purpose was to facilitate and/or finance production and trade of commodities, hence the name merchant. Few banks today restrict their activities to such a narrow scope, Merchant banks were in fact the first modern banks. As the Lombardy merchants and bankers grew in stature based on the strength of the Lombard plains cereal crops, the Florentine merchant banking community was exceptionally active and propagated new finance practices all over Europe. Both Jews and Florentine merchants perfected ancient practices used in the Middle East trade routes, originally intended for the finance of long trading journeys, these methods were applied to finance the medieval commercial revolution. In France during the 17th and 18th century, a merchant banker or marchand-banquier was not just considered a trader, Merchant banks in the United Kingdom came into existence in the early 19th century, the oldest being Barings Bank. The Jews could not hold land in Italy, so entered the great trading piazzas and halls of Lombardy, alongside the local traders. They had one advantage over the locals. Christians were strictly forbidden from any kind of lending at interest, in this way they could secure the grain-sale rights against the eventual harvest. They then began to advance payment against the delivery of grain shipped to distant ports. In both cases they made their profit from the present discount against the future price and this two-handed trade was time-consuming and soon there arose a class of merchants who were trading grain debt instead of grain. The buying of future crop and the trading of debt is analogous to the future contract market in modern finance. The Court Jew performed both financing and underwriting functions, financing took the form of a crop loan at the beginning of the growing season, which allowed a farmer to develop and manufacture his annual crop. Underwriting in the form of a crop, or commodity, insurance guaranteed the delivery of the crop to its buyer, typically a merchant wholesaler. He could also keep the farmer in business during a drought or other crop failure, and so the merchants benches in the great grain markets became centers for holding money against a bill. These deposited funds were intended to be held for the settlement of grain trades, the term bankrupt is a corruption of the Italian banca rotta, or broken bench, which is what happened when someone lost his traders deposits. Being broke has the same connotation, once again this merely developed what was an ancient method of financing long-distance transport of goods
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Pension fund
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A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides retirement income. Pension funds typically have large amounts of money to invest and are the investors in listed. They are especially important to the market where large institutional investors dominate. The largest 300 pension funds collectively hold about $6 trillion in assets, the Federal Old-age and Survivors Insurance Trust Fund is the worlds largest public pension fund which oversees $2.645 trillion USD in assets. Open pension funds support at least one pension plan with no restriction on membership while closed pension funds support only pension plans that are limited to certain employees, in certain countries the distinction between public or government pension funds and private pension funds may be difficult to assess. In others, the distinction is made sharply in law, with specific requirements for administration. Provident Fund is applicable across for employees across establishments, EPF is the Largest Social Security Organisations in India with Assets well over ₹5 Lakh Crore as of 2014. Indian citizens between the age of 18-55 are eligible to join, the Financial Supervisory Authority - Private Pension is responsible for the supervision and regulation of the private pension system.06. Armed Forces Pension Fund OYAK provides its members with supplementary retirement benefits apart from the retirement fund, T. C. Emekli Sandığı/SSK. OYAK is incorporated as an entity under its own law subject to Turkish civic. OYAK while fulfilling its duties, as set in the Law, also provides its members with social services such as loans, home loans. The initial source of OYAKs funds is a compulsory 10 percent levy on the salary of Turkeys 200,000 serving officers who, together with 25,000 current pensioners. Some other Turkish private pension funds, YAPI ve KREDİ BANKASI A. Ş, mensupları Yardım ve Emekli Sandığı Vakfı AKBANK T. A. Ş. Mensupları Tekaüt Sandığı Vakfı TÜRKİYE GARANTİ BANKASI A. Ş, memur ve Müstahdemleri Emekli ve Yardım Sandığı Vakfı TÜRKİYE ODALAR BORSALAR VE BİRLİK PERSONELİ SİGORTA VE EMEKLİ SANDIĞI VAKFI TÜRKİYE İŞ BANKASI A. Ş. Mensupları Emekli Sandığı Vakfı In the United States pension funds include schemes which result in a deferral of income by employees, the United States has $24.5 trillion in retirement and pension assets as of June 30,2014. The largest 200 pension funds accounted for $4.540 trillion as of September 30,2009
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Sovereign wealth fund
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Most SWFs are funded by revenues from commodity exports or from foreign-exchange reserves held by the central bank. By historic convention, the United States Social Security Trust Fund, other sovereign wealth funds are simply the state savings that are invested by various entities for the purposes of investment return, and that may not have a significant role in fiscal management. These are assets of the nations that are typically held in domestic. Such investment management entities may be set up as official investment companies, state funds, or sovereign funds. There have been attempts to distinguish funds held by sovereign entities from foreign-exchange reserves held by central banks, Sovereign wealth funds can be characterized as maximizing long-term return, with foreign exchange reserves serving short-term currency stabilization, and liquidity management. Many central banks in recent years possess reserves massively in excess of needs for liquidity or foreign exchange management. Moreover, it is believed most have diversified hugely into assets other than short-term, highly liquid monetary ones. Some central banks have begun buying equities, or derivatives of differing ilk. The term sovereign wealth fund was first used in 2005 by Andrew Rozanov in an article entitled, some of them have grabbed attention making bad investments in several Wall Street financial firms such as Citigroup, Morgan Stanley, and Merrill Lynch. These firms needed a cash infusion due to losses resulting from mismanagement, SWFs invest in a variety of asset classes such as stocks, bonds, real estate, private equity and hedge funds. Many sovereign funds are directly investing in real estate. In the first half of 2014, global sovereign wealth fund direct deals amounted to $50.02 bil according to the SWFI, Sovereign wealth funds have existed for more than a century, but since 2000, the number of sovereign wealth funds has increased dramatically. The first SWFs were non-Federal U. S. state funds established in the century to fund specific public services. The U. S. state of Texas was thus the first to establish such a scheme, the Permanent School Fund was created in 1854 to benefit primary and secondary schools, with the Permanent University Fund following in 1876 to benefit universities. The PUF was endowed with lands, the ownership of which the state retained by terms of the 1845 annexation treaty between the Republic of Texas and the United States. While the PSF was first funded by an appropriation from the state legislature, the first SWF established for a sovereign state is the Kuwait Investment Authority, a commodity SWF created in 1953 from oil revenues before Kuwait gained independence from the United Kingdom. According to many estimates, Kuwaits fund is now worth approximately US$600 billion, another early registered SWFs is the Revenue Equalization Reserve Fund of Kiribati. Created in 1956, when the British administration of the Gilbert Islands in Micronesia put a levy on the export of used in fertilizer
30.
Equity co-investment
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In certain circumstances, venture capital firms may also seek co-investors. Private equity firms seek co-investors for several reasons, co-investors bring a friendly source of capital. Typically, co-investors are existing limited partners in an investment fund managed by the financial sponsor in a transaction. Unlike the investment fund however, co-investments are made outside of the existing fund, Co-investments are typically passive, non-controlling investments, as the private equity firm or firms involved will exercise control and perform monitoring functions. As a result, many private equity firms offer co-investments to their largest and most important investors as an incentive to invest in future funds. Private equity Fund of funds Financial sponsor CalPERS - Private Equity Industry Dictionary AltAssets Glossary AltAssets, The direct route Co-investments in funds of funds and separate accounts
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Financial sponsor
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A financial sponsor is a private equity investment firm, particularly a private equity firm that engages in leveraged buyout transactions. The companys CEO and other senior management maintain responsibility for day-to-day operational issues, various investor classes look to the financial sponsor to generate value in a company as much as the management or operations of the company. Additionally, many owned by financial sponsors will raise equity in the public markets through an initial public offering or as a means of exiting an investment. Various studies have been conducted to evaluate the impact of financial sponsor ownership on the performance of IPOs, Private equity Private equity firm Leveraged buyout
32.
Divisional buyout
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A divisional buyout or carveout, in finance, is a transaction in which a corporate division, business unit or subsidiary is acquired using the same financial structuring as a leveraged buyout. A D-RLBO is a leveraged buyout of a division or subsidiary that subsequently comes to trade on the public markets, example, Avon Products Inc. divested specialty jeweler Tiffany & Co. to private equity investors who subsequently accomplished an initial public offering. Hite, G. & Vetsuypens, M. R.1989, management buyouts of divisions and shareholder wealth. The Journal of Finance,44,953 –970, management buyout, Distinguishing characteristics and operating changes priorto public offering
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Leveraged recapitalization
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Such a maneuver is called a leveraged buyout when initiated by an outside party, or a leveraged recapitalization when initiated by the company itself for internal reasons. These types of recapitalization can be minor adjustments to the structure of the company. Leveraged recapitalizations are used by privately held companies as a means of refinancing, debt has some advantages over equity as a way of raising money, since it can have tax benefits and can enforce a cash discipline. The reduction in equity also makes the less vulnerable to a hostile takeover. Leveraged recapitalizations can be used by companies to increase earnings per share. This form of recapitalization can lead a company to focus on projects that generate cash. Also, if a firm cannot make its payments, meet its loan covenants or rollover its debt it enters financial distress which often leads to bankruptcy. Therefore, the debt burden of a leveraged recapitalization makes a firm more vulnerable to unexpected business problems including recessions. Capital structure substitution theory Leveraged buyout Dividend recapitalization Downes, John, dictionary of Finance and Investment Terms. CS1 maint, Multiple names, authors list Recapitalization at Investorwords. com
34.
Dividend recapitalization
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A dividend recapitalization in finance is a type of leveraged recapitalization in which a payment is made to shareholders. As opposed to a dividend which is paid regularly from the companys earnings. These types of recapitalization can be minor adjustments to the structure of the company. As with other leveraged transactions, if a firm cannot make its debt payments, therefore, the additional debt burden of a leveraged recapitalization makes a firm more vulnerable to unexpected business problems including recessions and financial crises. Typically a dividend recapitalization will be pursued when the equity investors are seeking to realize value from a private company, in their relatively brief period of management of Hostess Brands, maker of Twinkie brand snack cakes and other products, Apollo Global Management and C. Dean Metropoulos and Company added leverage and took a $900 million dividend, the third largest of 2015 in the private equity industry
35.
Business incubator
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A business incubator in business speak is a company that helps new and startup companies to develop by providing services such as management training or office space. The National Business Incubation Association defines business incubators as a catalyst tool for regional or national economic development. Business incubators differ from research and technology parks in their dedication to startup, research and technology parks, on the other hand, tend to be large-scale projects that house everything from corporate, government or university labs to very small companies. Most research and technology parks do not offer business assistance services, however, many research and technology parks house incubation programs. Incubators also differ from the U. S, Small Business Administrations Small Business Development Centers in that they serve only selected clients. SBDCs are required by law to general business assistance to any company that contacts them for help. In addition, SBDCs work with any business at any stage of development. Many business incubation programs partner with their local SBDC to create a shop for entrepreneurial support. Within European Union countries there are different EU and state funded programs that support in form of consulting, mentoring, prototype creation and other services. TecHub is one of examples for IT companies and ideas, the formal concept of business incubation began in the USA in 1959 when Joseph Mancuso opened the Batavia Industrial Center in a Batavia, New York, warehouse. Incubation expanded in the U. S. in the 1980s and spread to the UK, the U. S. -based International Business Innovation Association estimates that there are about 7,000 incubators worldwide. A study funded by the European Commission in 2002 identified around 900 incubation environments in Western Europe, as of October 2006, there were more than 1,400 incubators in North America, up from only 12 in 1980. Her Majestys Treasury identified around 25 incubation environments in the UK in 1997, by 2005, in 2005 alone, North American incubation programs assisted more than 27,000 companies that provided employment for more than 100,000 workers and generated annual revenues of $17 billion. Manufacture New York is a Manhattan-based fashion incubator and small-run production facility, Incubators have been of increased presence since 2011. New experiments like Virtual Business Incubators are bringing the resources of entrepreneurship hubs like Silicon Valley to remote locations all over the world, since startup companies lack many resources, experience and networks, incubators provide services which helps them get through initial hurdles in starting up a business. These hurdles include space, funding, legal, accounting, computer services, technology incubators account for 39% of incubation programs. One example of a type of incubator is a bioincubator. Bioincubators specialize in supporting life science-based startup companies, entrepreneurs with feasible projects in life sciences are selected and admitted for these programs
36.
Post-money valuation
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Post-money valuation is the value of a company after an investment has been made. This value is equal to the sum of the pre-money valuation, external investors, such as venture capitalists and angel investors, will use a pre-money valuation to determine how much equity to demand in return for their cash injection to a company. The implied post-money valuation is calculated as the amount of investment divided by the equity stake gained in an investment. If a company is worth $100 million and an investor makes an investment of $25 million, the investor will now own 20% of the company. This basic example illustrates the general concept, strictly speaking, the calculation is the price paid per share multiplied by the total number of shares existing after the investment—i. e. It takes into account the number of shares arising from the conversion of loans, exercise of in-the-money warrants, thus it is important to confirm that the number is a fully diluted and fully converted post-money valuation. The company receives an offer to invest $8,000,000 at $8 per share, the post-money valuation is equal to $8 times the number of shares existing after the transaction—in this case,2,366,667 shares. This figure includes the original 1,000,000 shares, plus 1,000,000 shares from new investment, plus 166,667 shares from the loan conversion, the fully converted, fully diluted post-money valuation in this example is $18,933,336. Note that the warrants cannot be exercised because they are not in-the-money, Pre-money valuation Forbes Investopedia, Whats the difference between pre-money and post-money. Ryan Roberts, What is a Pre-money and Post-money Valuation, samuel Wu, Venture Capital 101 for Startups - Valuation Joseph W. Bartlett, A Missing Piece of the Valuation Puzzle
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Pre-money valuation
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A pre-money valuation is a term widely used in private equity or venture capital industries, referring to the valuation of a company or asset prior to an investment or financing. If an investment adds cash to a company, the company will have different valuations before, the pre-money valuation refers to the companys valuation before the investment. This is calculated on a diluted basis. Usually, a company receives many rounds of financing rather than a big sum in order to decrease the risk for investors. Pre- and post-money valuation concepts apply to each round, own 100 shares, which is 100% of equity. If an investor makes a $10 million investment into Widgets, Inc, in this case, it is, $60 million – $10 million = $50 million The initial shareholders dilute their ownership to 100/120 =83. 33%. Lets assume that the same Widgets, Inc. gets the second round of financing, a new investor agrees to make a $20 million investment for 30 newly issued shares. If you follow the example above, it has 120 shares outstanding, post-money valuation is, $20 million * = $100 million The pre-money valuation is, $100 million – $20 million = $80 million The initial shareholders further dilute their ownership to 100/150 =66. 67%. Upround and downround are two associated with pre- and post-money valuations. If the pre-money valuation of the round is higher than the post-money valuation of the last round. If the pre-money valuation is lower than the valuation of the previous round. In the above example, Round B was an upround investment, a successful growing company usually receives a series of uprounds until it is launched on the stock market, sold, or merged. Downrounds are painful events for initial shareholders and founders, as they cause substantial ownership dilution, downrounds were common during the dot-com crash of 2000–2001
38.
Seed money
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Seed money, sometimes known as seed funding or seed capital, is a form of securities offering in which an investor invests capital in exchange for an equity stake in the company. The term seed suggests that this is an early investment, meant to support the business until it can generate cash of its own. Seed money options include friends and family funding, angel funding, Seed money can be used to pay for preliminary operations such as market research and product development. Investors can be the founders themselves, using savings and loans and they can be family members and friends of the founders. Investors can also be outside angel investors, venture capitalists, accredited investors, Seed funding involves a higher risk than normal venture capital funding since the investor does not see any existing projects to evaluate for funding. Hence, the investments made are usually lower as against normal venture capital investment, Seed funding can be raised online using equity crowdfunding platforms such as SeedInvest, Seedrs and Angels Den. Investors make their decision whether to fund a project based on the strength of the idea. Seed money may also come from product crowdfunding or from financial bootstrapping, bootstrapping in this context means making use of the cash flow of an existing enterprise, such as in the case of Chitika and Cidewalk. Government funds may be targeted toward youth, with the age of the founder a determinant, often, these programmes can be targeted towards adolescent self-employment during the summer vacation. Depending on the system, municipal government may be in charge of small disbursements. The European Commission runs microfinance programmes for self-employed people and businesses with fewer than 10 employees, European seed capital is available, but typically is limited to a 50% share. European SMEs can often benefit from the Eureka programme, which federates SMEs and research organisations,23 page description of EU support programmes for SMEs inventorium. org - South-West UK specific list European Commission page on Seed and start-up finance Angel investor Series A round
39.
Venture capital financing
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Venture capital financing is a type of financing by venture capital. It is private equity capital provided as seed funding to early-stage, high-potential and it is provided in the interest of generating a return on investment through an eventual realization event such as an IPO or trade sale of the company. To start a new company or to bring a new product to the market. There are several categories of financing possibilities, smaller ventures sometimes rely on family funding, loans from friends, personal bank loans or crowd funding. For more ambitious projects, some companies need more than mentioned above. These are private investors who are using their own capital to finance a ventures need, apart from these investors, there are also venture capitalist firms who are specialized in financing new ventures against a lucrative return. VC firms may also provide expertise the venture is lacking, such as legal or marketing knowledge and this is particularly the case in the Corporate venture capital context where a startup can benefit from a corporation, for instance by capitalizing on the corporations brand name. This may happen if the venture does not perform as expected due to bad management or market conditions, the following schematics shown here are called the process data models. All activities that find place in the venture capital financing process are displayed at the side of the model. Each box stands for a stage of the process and each stage has a number of activities, at the right side, there are concepts. Concepts are visible products/data gathered at each activity and this diagram is according to the modeling technique developed by Sjaak Brinkkemper of the University of Utrecht in the Netherlands. This is where the seed funding takes place and it is considered as the setup stage where a person or a venture approaches an angel investor or an investor in a VC firm for funding for their idea/product. During this stage, the person or venture has to convince the investor why the idea/product is worthwhile, the investor will investigate into the technical and the economical feasibility of the idea. In some cases, there is sort of prototype of the idea/product that is not fully developed or tested. If the idea is not feasible at this stage, and the investor does not see any potential in the idea/product, the investor will not consider financing the idea. However, if the idea/product is not directly feasible, but part of the idea is worthy of further investigation, a Dutch venture named High 5 Business Solution V. O. F. wants to develop a portal which allows companies to order lunch. To open this portal, the venture needs some financial resources, they also need marketeers, to attract these financial and non-financial resources, the executives of the venture decide to approach ABN AMRO Bank to see if the bank is interested in their idea. After a few meetings, the executives are successful in convincing the bank to take a look in the feasibility of the idea, ABN AMRO decides to put a few experts for investigation
40.
Venture debt
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Venture debt can compliment venture capital and provide value to fast growing companies and their investors. Unlike traditional bank lending, venture debt is available to startups, Venture debt providers combine their loans with warrants, or rights to purchase equity, to compensate for the higher risk of default. Venture debt can be a source of capital for entrepreneurial companies, Venture debt is typically structured as one of three types, Growth capital, Typically term loans, used as equity round replacements, for M&A activity, milestone financing or working capital. Accounts receivable financing, borrowings against the accounts receivable item on the balance sheet, equipment financing, loans for the purchase of equipment such as network infrastructure. Venture lenders frequently piggyback on the due diligence done by the capital firm. While there are over 100 active venture debt providers, they are classified into two categories,1. These banks typically accept deposits from the companies, and offer venture debt to complement their overall service offerings. Venture debt is not bread and butter for these providers. Debt lines from the start as low as $100,000 and for appropriately backed and/or companies with scale. Some players in this category are, Bridge Bank City National Bank Comerica East West Bank Silicon Valley Bank Square 1 Bank Wells Fargo 2, specialty finance firms Commercial banks at times can be limited in the dollar size of the loans, or strict covenants attached. The venture debt firms typically provide higher dollar size and more flexible loan terms, industry Dynamics As a rule of thumb, the size of venture debt investment in a company is roughly 1/3 to 1/2 of venture capital. The VC industry invested around $27B in the last 12 months and this would imply around $9B potential debt market. However, not all VC-backed companies receive venture debt, and a study has estimated that lenders provide one venture debt dollar for every seven venture capital dollar invested. This implies around $3. 9B debt market, there are several philosophies behind the various players. As a rule, they all prefer better branded VCs backing any potential portfolio company - some are more militant about this than others. They universally will provide capital to companies still in a money loss mode, with variances around comfort on timelines to breakeven, next round of capital, recently raised equity, etc. Since most startups tap into venture debt to augment equity, the size of the venture debt industry follows the movement of the VC industry, Venture debt lenders expect returns of 12–25% on their capital but achieve this through a combination of loan interest and equity returns. Equipment financing can be provided to fund 100% of the cost of the capital expenditure, receivables financing is typically capped at 80–85% of the accounts receivable balance
41.
Venture round
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A venture round is a type of funding round used for venture capital financing, by which startup companies obtain investment, generally from venture capitalists and other institutional investors. The availability of funding is among the primary stimuli for the development of new companies and technologies. A lead investor, typically the best known or most aggressive venture capital firm that is participating in the investment, the lead investor typically oversees most of the negotiation, legal work, due diligence, and other formalities of the investment. It may also introduce the company to investors, generally in an informal unpaid capacity. Co-investors, other investors who contribute alongside the lead investor Follow-on or piggyback investors. Investors and companies seek each other out through formal and informal networks, personal connections, paid or unpaid finders, researchers and advisers. The company provides the investment firm a confidential business plan to secure initial interest Private placement memorandum, a PPM/prospectus is generally not used in the Silicon Valley model Negotiation of terms. Non-binding term sheets, letters of intent, and the like are exchanged back, once the parties agree on terms they sign the term sheet as an expression of commitment. A drawn-out process of negotiating and drafting a series of contracts, in theory, these simply follow the terms of the term sheet. In practice they contain many important details that are beyond the scope of the deal terms. Definitive transaction documents are not required in all situations, specifically where the parties have entered into a separate agreement that does not require that the parties execute all such documents. Definitive documents, the papers that document the final transaction. Simultaneously with negotiating the definitive agreements, the investors examine the financial statements and books and records of the company and they may require that certain matters be corrected before agreeing to the transaction, e. g. new employment contracts or stock vesting schedules for key executives. Final agreement occurs when the parties execute all of the transaction documents and this is generally when the funding is announced and the deal considered complete, although there are often rumors and leaks. Closing occurs when the investors provide the funding and the company provides stock certificates to the investors, ideally this would be simultaneous, and contemporaneous with the final agreement. However, conventions in the community are fairly lax with respect to timing and formality of closing. To reduce cost and speed up transactions, formalities common in industries such as escrow of funds, signed original documents. This creates some opportunity for incomplete and erroneous paperwork, however, disputes are rare and few if any deals unravel between final agreement and closing
42.
Private equity fund
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A private equity fund is a collective investment scheme used for making investments in various equity securities according to one of the investment strategies associated with private equity. Private equity funds are typically limited partnerships with a term of 10 years. At inception, institutional investors make a commitment to the limited partnership. From the investors point of view, funds can be traditional or asymmetric, a private equity fund is raised and managed by investment professionals of a specific private equity firm. Typically, a private equity firm will manage a series of distinct private equity funds. Most private equity funds are structured as limited partnerships and are governed by the terms set forth in the partnership agreement or LPA. Distribution Waterfall, The process by which the capital will be distributed to the investor. Transfer of an interest in the fund, Private equity funds are not intended to be transferred or traded, however, typically, such a transfer must receive the consent of and is at the discretion of the funds manager. Restrictions on the General Partner, The funds manager has significant discretion to make investments, the following is an illustration of the difference between a private equity fund and a private equity firm, A private equity fund typically makes investments in companies. These portfolio company investments are funded with the capital raised from LPs, some private equity investment transactions can be highly leveraged with debt financing—hence the acronym LBO for leveraged buy-out. The cash flow from the company usually provides the source for the repayment of such debt. While billion dollar private equity investments make the headlines, private equity funds also play a role in middle market businesses. Such LBO financing most often comes from commercial banks, although other financial institutions, such as funds and mezzanine funds. Since mid-2007, debt financing has become more difficult to obtain for private equity funds than in previous years. Private equity multiples are highly dependent on the companys industry, the size of the company. A private equity funds ultimate goal is to sell or exit its investments in companies for a return. These exit scenarios historically have been an IPO of the company or a sale of the company to a strategic acquirer through a merger or acquisition. A sale of the company to another private equity firm
43.
Limited partnership
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The GPs are, in all major respects, in the same legal position as partners in a conventional firm, i. e. Like shareholders in a corporation, limited partners have limited liability and this means that the limited partners have no management authority, and are not liable for the debts of the partnership. The limited partnership provides the limited partners a return on their investment, General Partners thus bear more economic risk than do limited partners, and in cases of financial loss, the GPs will be the ones which are personally liable. Limited partners are subject to the same alter-ego piercing theories as corporate shareholders, however, it is more difficult to pierce the limited partnership veil because limited partnerships do not have many formalities to maintain. So long as the partnership and the members do not co-mingle funds, Partnership interests are afforded a significant level of protection through the charging order mechanism. The charging order limits the creditor of a debtor-partner or a debtor-member to the share of distributions. When the partnership is being constituted, or the composition of the firm is changing, Limited partners must explicitly disclose their status when dealing with other parties, so that such parties are on notice that the individual negotiating with them carries limited liability. Limited partnerships are distinct from limited liability partnerships, in which all partners have limited liability, in some jurisdictions, the limited liability of the limited partners is contingent on their not participating in management. The societates publicanorum, which arose in Rome in the third century BC, during the heyday of the Roman Empire, they were roughly equivalent to todays corporations. Some had many investors, and interests were publicly tradable, however, they required at least one partners with unlimited liability. According to Jairus Banaji, the Qirad and Mudaraba institutions in Islamic law, in medieval Italy, a business organization known as the commenda appeared in the 10th century that was generally used for financing maritime trade. In a commenda, the trader of the ship had limited liability. In contrast, his investment partners on land had unlimited liability and were exposed to risk, a commenda was not a common form for a long-term business venture as most long-term businesses were still expected to be secured against the assets of their individual proprietors. As an institution, the commenda is very similar to the qirad but whether the qirad transformed into the commenda, colberts Ordinance and the Napoleonic Code reinforced the limited partnership concept in European law. In the United States, limited partnerships became available in the early 19th century. Britain enacted its first limited partnership statute in 1907, for a list of types of corporation and other business types by country, see Types of business entity. They are also useful in labor-capital partnerships, where one or more financial backers prefer to contribute money or resources while the other partner performs the actual work, in such situations, liability is the driving concern behind the choice of limited partnership status. The limited partnership is also attractive to firms wishing to provide shares to individuals without the additional tax liability of a corporation
