1. Preferred Stock, Venture Capital and Private Equity
Raising Capital Part 2
Preferred Stock, Venture Capital and Private Equity

2. Lets look at what we discussed till now
Equity
IPO
FPO
Right Issue
Venture Capital
Private Placement
Long Term Debt

3. Preferred Stock
Preferred stock generally has some preference, or priority, with respect to common stock.

4. Preferred Stock Two common preferences are: Dividend preference
preferred shareholders receive dividends on their shares before common shareholders do.
Liquidation preference
In the event of the failure of the company, preferred shareholders will receive payment in full before common shareholders.
This liquidation preference makes preferred shares less risky to own in the event of business failure than common shares.

5. Types of Preferred Stock
Cumulative preferred:
Dividends in arrears and current year’s dividends must be paid before common dividends can be paid.
Convertible preferred:
convertible into a specified number of shares of common.

6. Usual Features of Preferred Stock
1. Voting
Usually nonvoting but does have contingent voting rights. This is the right to elect some of the directors.
Usually have the right to vote for approval on the issuance of additional Preferred Stock.
2. Maturity and Call
Typically Preferred Stock has no maturity date (like C/S).
The typical Preferred is callable.

7. Preferred Stock as an Investment
Better suited for the Institution
Does not have the security of Bonds,
more volatile
Only becomes attractive when the yield is greater than Bonds

8. Why company issues Preferred Stock
Alternative or supplement to common stock
Companies that want to limit the control they give to stockholders while still offering equity positions in their businesses
Already loaded their balance sheet with a large amount of debt and risk a downgrade if they piled on more. 
Preferred stocks do not follow the same guidelines of debt repayment as Bond because they are equity issues.
Dividend payments can be deferred by the company if it falls into a period of tight cash flow or other financial hardship. 

9. Why not preferred stock
longer maturities have the poorest risk/reward characteristics -- the lowest return for a given level of risk
Call provision
If rates rise, the price of the preferred stock will likely fall
If rates fall, the issuer will likely call the preferred stock and replace it with a new preferred issue at a lower rate, conventional debt, or perhaps even common stock

10. Private Equity – Broadly Defined
Technically refers to any type of equity investment in an asset in which the equity is not freely tradable on a public market.
Long Term in nature

11. Categories and Players
Private Equity
Later Stage, Buyout, Special Situations
Angel
Early Stage: Seed, Start-up
Professional Venture Capital
Early Stage, Expansion, Later Stage

12. Traditional Private Equity – Primary Activity
Professional pools of capital that buy all the publicly traded equity of target companies = “Go Private”
Usually done with borrowed money
High degree of leverage
Aka : Leveraged Buyout

13. Private Equity
Private equity firms mostly buy mature companies that are already established.
The companies may be deteriorating or not making the profits they should be due to inefficiency.
Private equity firms buy these companies and streamline operations to increase revenues.
can save poorly-performing companies from bankruptcy and turn them into profitable enterprises

14. Private Equity (PE)
Private equity firms mostly buy 100% (or take control) ownership of the companies in which they invest.
The companies are in total control of the firm after the buyout.
Existing company with existing products and existing cash flows, then restructuring that company to optimize its financial performance

15. The Private Equity Market

16. Venture Capital (VC) Venture Capital A subset of Private Equity
Money invested to finance a new firm
Since success of a new firm is highly dependent on the effort of the managers, restrictions are placed on management by the venture capital company and funds are usually dispersed in stages, after a certain level of success is achieved. 4

17. Venture Capital 5

18. Venture Capital 6

19. Feature of Venture capital*
Invested through firms which are private partnership or closely held corporation
Raised from private and public pension funds, endowment fund, corporations, wealthy individual, corporations, foreign investor
More directed toward innovative, rapidly growing high technology companies
Equity investment or convertible stock
High risk with the expectation of high return
* According to National Venture Capital Association of USA:

20. FIGURE 15.1 Indian Venture Capital Investments ($ Billions)
The graph shows how venture capital investment has grown over time.
Source: Turning the Corner, Global Venture Capital Insights and Trends, 2013, Ernst & Young.

22. Comparison
PE firms prefer to concentrate all their effort in a single company. Investment up to $100M
Venture capitalists spend $10 million or less in each company, since they mostly deal with start-ups with unpredictable chances of failure or success.

23. Comparison Private equity firms can buy companies from any industry,
Venture capital firms are limited to start-ups in technology, biotechnology and clean technology.
Private equity firms also use both cash and debt in their investment, but venture capital firms deal with equity only.

24. Exit: PE and VC Investment horizon 5 to 7 years
selling their investments in equity financing, such as initial public offerings (IPOs).
Merger and or Acquisition

25. IFC Business Oxygen Fund
Nepal’s first private-equity fund. 
IFC has committed $7 million to this $14 million sector-agnostic fund.
The fund combines risk capital financing with advisory support
develop fundamental financial systems,
quality-assurance standards,
corporate governance frameworks. 
White Lotus Centre Pvt. Ltd. as fund manager

26. Nepali Practice Largest Private equity transaction
Axiata Investments (UK) Ltd had signed a deal to the acquisition of the entire issued capital of Reynolds Holdings Ltd, which in turn holds an 80% stake in Ncell. (US$1.37 billion)

27. NCELL

28. Dolma Impact Fund I
Providing growth capital to Small and Medium Enterprises (SMEs).
The fund’s first close is subscribed at USD21m and is now open for final close commitments with a target size of USD40m. 

29. Issues Mostly in Hydropower project and Hotel Legal issues Exit issues
Labour

30. Challenge for CFO Private equity look for majority controlling
VC minority but disbursement is in a stages