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Starting and growing a business always require capital. There are a number of alternative methods to fund growth. These include the owner or proprietor’s own capital, arranging debt finance, or seeking an equity partner, as is the case with private equity and venture capital.
Traditional Sources of Funds or Capital Owner's Capital Shareholders' Capital Retained Profit Debentures Overdraft Bank Loan Leasing Hire Purchase Buying on Credit Selling Assets Factoring
Emerging Source of Funds or Capital Private Equity
Private equity is a broad term that refers to any type of non- public ownership equity securities that are not listed on a public exchange, Investments by private equity most often involve either an investment of capital into an operating company or the acquisition of an operating company, Normally the private equity firm buys majority of control of an existing or mature firm rather than in a young companies, PE firms invest in companies not for regular return motive but for having a capital gain by selling of shares through IPO after a long period (it may range between 5 to 10 years),
Types of Private Equity Venture Capital Growth Capital Mezzanine Capital Secondary's
Venture Capital VC is originally known as Development Capital, VC is a broad subcategory of private equity, Which is a means of equity financing for rapidly-growing private companies, This Finance may be required for the start-up, development/expansion or purchase of a company, The goal of venture capital is to build companies so that the shares become liquid (through IPO) and provide a rate of return to the investors (in the form of cash or shares) that is consistent with the level of risk taken,
Conceptual Framework of VC With venture capital financing, the venture capitalist acquires an agreed proportion of the equity of the company in return for the funding, Equity finance offers the significant advantage of having no interest charges, It is "patient" capital that seeks a return through long-term capital gain rather than immediate and regular interest payments, as in the case of debt financing, Venture capitalists act as mentors and aim to provide support and advice on a range of management, sales and technical issues to assist the company to develop its full potential, Following the nature of equity financing, venture capital investors are therefore exposed to the risk of the company failing, That is why the venture capitalist must look to invest in companies which have the ability to grow very successfully and provide higher than average returns to compensate for the risk,
Advantages of Venture capital VC Provides long term equity finance which gives a solid capital base for future growth, The venture capitalist is a business partner, sharing both the risks and rewards. Venture capitalists are rewarded by business success and the capital gains, The venture capitalist is able to provide practical advice and assistance to the company based on past experience with other companies which were in similar situations, The venture capitalist also has a network of contacts in many areas that can add value to the company, such as in recruiting key personnel, providing contacts in international markets, introductions to strategic partners, and if needed co- investments with other venture capital firms when additional rounds of financing are required, The venture capitalist may be capable of providing additional rounds of funding should it be required to finance growth,
Structure of VC Venture capital firms are typically structured as a partnership firms, Partners serve as the managers of the firm as well as serve as investment advisors to the venture capital funds raised, This partnership comprises both high net worth individuals and institutions with large amounts of available capital, such as Banks, insurance companies, Mutual Funds etc. Venture capital firms typically comprise small teams with technology backgrounds (scientists, researchers) or those with business training or deep industry experience,
Sources of Funds for VC Venture capital firms typically source the majority of their funding from large investment institutions such as MF, financial institutions, pension funds, Insurance Companies and banks, These institutions typically invest in a venture capital fund for a period of up to ten years, To compensate for the long term commitment and lack of both security and liquidity, investment institutions expect from VC to receive very high returns on their investment, Although the venture capitalist may receive some return through dividends but their primary return on investment comes from capital gains when they eventually sell their shares in the company, typically between three to five years after the investment,
Investment Process The investment process begins with the venture capitalist conducting an initial review of the proposal to determine if it fits with the firm's investment criteria (using Financial modeling), This process has following steps Preliminary Screening Negotiating Investment Memorandum of understanding (MoU) Approvals and Investment
Growth Capital Companies seek growth capital normally in transformational event in their life cycle either in course of expansions, acquisitions or other investments, These companies are able to generate revenue and operating profits but unable to generate sufficient cash to fund major expansions, acquisitions or other investments. Growth capital refers to equity investments in relatively mature companies that are looking for capital to expand or restructure operations, The investment refers most often minority investments,
Mezzanine capital Mezzanine capital refers to the most junior portion of a company's capital structure, This form is used by PE funders in case of Leverage buy out, For this they charge very high rate of return because of increased risk,
Private Equity Firms As ranked by the PEI 300, the 10 largest private equity firms in the world are: 1.TPG 2.Goldman Sachs Capital Partners 3.The Carlyle Group 4.Kohlberg Kravis Roberts 5.Apollo Global Management 6.Bain Capital 7.CVC Capital Partners 8.The Blackstone Group 9.Warburg Pincus 10.Apax Partners
Assignment Private Equity Firms in India…………….
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