Private Equity and Venture Capital

Temporary provision of equity capital which is not traded public.

PE is the overall term while VC is a subset.

• Company founders

  • Innovative, private companies with high growth and default potential

  • Goal: Successful implementation / expansion of Business Idea

• Investors

  • Banks, insurance companies, pensions funds (institution inverstors

  • Private individuals

  • Goal: Realization of Capital Gains

• High default risk

• Steep Asymmetries in Information

• No provision of collateral

• Finaning design

• Conflict of interest

• Lack of mgmt experience

Asymmetric information

• Estimation of founder Know-How is difficult (adverse selection)

• Early developement is hard to control (moral hazard)

• Investors are intersted in short-term investments

• Product developement requires long-term financing

• VC providers are interestet in realization of capital gains

• Foundes are more intersted in results of research

• Temporary provision of equity in private firms

  • 3-10 Years and stage financing

  • No Provison of Collateral

  • Stage Financing

• Realization of Capital Gains

  • No liquidity withdraw

  • Realization is when the Shares are sold

• Advisory role of affiliate company to managment

  • Support via know-how transfer and involvement in decision making

• fixed interst and payments increases pressure on liquidity

• In a high risk enviroment, credit finance leads to negative mgmt. incentive

• With fix payments, no profit participation if outcoume is successful

• No Participation for the long-run, therefore creditors dont have the incentive for consulting and control

1. Seed financing

   • Product development

   • Business Plan

2. Start up financing

   • Market Introduction

   • Product Marketing

   • Start of production

   • Company formation

It is the expansion and bridge financing fpr medium sized companies

• Expansion financing

• Bridge financing

• Turnaround financing

• Replacement Capital

• Expanding and diversification of production range

• Development of new market

• Acquisitions

• Preperation for an IPO with improving the equity ratio

• Bridgin of financing constrains in case of IPO delay

Medium term correction of decline earnings from environmental situation. (Restructuring or repair of a company)

Finance a company share for the case a shareholder will retire

Takeover of the Company through Mgmt and PE Investor

• MBO (Mgmt Buy-Out)

• MBI (Mgmt Buy-In)

• LBO (Leveraged Buy-Out)

• Spin Off

Takeover of the majority of shares thorugh the Management with the support of PE Investor

• Takeover of Shares thorugh external Management with the Support of PE Investors

• Succession planing and missmanagement

• Debt financed acquisition of shares

• Future Cash-Flow of target to finance interest and principal payments

• Hybrid Instrument with equity and debt

• Running interest rate with additional performance based components

• Uses in Expansion, Buy-Outs and acquisitions

• Outsorucing business units from parent company

• Finance MBO through sales of business unit

• Loans

• Bonds

• Customer Prepayments

• Supplier Credits

• Shares

• Private Equity

• Retained Earnings

  
  

• Convertiable or warrant bonds

• Shareholder loans

• Subordinated loans

• Silent participation

• Flexible design

• Higher level of debt possible

• Improvement of Balance Sheet Structure

• Independent of the legal form

• No dilution of shares

• High Cost of Capital

• Stable Cash-Flows required

• Covenants

• conversion to equity can cause dilution of shares

The instruments what are more debtlike have lower risk than instruments with more equity like

• Goal

  • Realization of Capital Gains

  • Conversion of tied funds into cash

• Exit Options

  • IPO

  • Trade Sale

  • Buy Back

  • Secondary purchase

  • Liquidation

• First time of emission in capital market

• Most attractive exit-option

• Ensures the independence of a Company

• Strengthening of equity base and competitiveness

• Reduction of Borrowing costs

• Extension of Investment Group

• Resale to strategic investor

• Process is faster than IPO

• Merger with industrial investor leads to loss of independence

  
  

• Repurchase of affiliated shares through former owners

• Perserving the company independece

• Sector specific and technical know-how of former owners

  
  

• Resale to financial investor

• Unscheduled development of company

Liquidation of Assets. Used when the company fails.

• Direct Investment in non listed companies

• Through PE Funds

• Through PE Funds of Funds

• Stage Financing

  • finance packages in tranches and are payed if defined milestones are achieved

• More control and involvement for affiliated companies

• Advisory Role of the affiliated company

• incentive contracts for founder

  • Major stake and high profit participation

• NPV

• IRR

• DCF

• Real Option approach