Why companies seek equity financing and types?
“1) They do not have further debt capacity
2) The shareholders prefer the added flexible, less restrictive nature of equity capital, relative to debt.
Ventures funded:
• Seed (R&D and concept) or start-up (commercialization) capital;
• Asset acquisition (e.g., machinery, a plant, etc.) for expansion;
• New product development, introduction, and commercialization;
• Purchase of a competitor (sector consolidation);
• Pre-IPO capitalization;
• Management buy-out (MBO) or leveraged buy-out (LBO);
• A change in ownership (or the owner’s retirement);”
Advantages of equity
"- Stronger balance sheet. - No required repayment or guarantees. - Long-term, patient funding. - No debt service means more sustaining power (if there is a setback) - Supports long-term needs where return is uncertain. -Increases availability of assets for other financing purposes - Less restrictive on the use of funds. - Increases business credibility -First step toward a public offering of shares. - Offers flexibility and capacity to realize growth objectives. - Less risks make the company more attractive to investors / creditors."
Disadvantages of equity
"- Dilutes ownership and control. - Original owner(s) must share upside. - Valuation problems may arise. - Often means restrictive covenants via shareholders’ agreements. - Investors usually want a say in the decisions (e.g.,. a seat on the board). - Perceived as expensive capital (investors usually seek high returns). - Difficult and costly to raise. - Dividends paid are not tax deductible. - May require new governance (reporting) and management processes. - Owner must distinguish their own assets from those of the company. - Limited sources and lengthy process."
types of equity investors
“• Angel Investors: high net worth individuals
• Venture Capital Investors: funds, corporate investment arms, high net worth - seek 30%+
• Private Equity Investors - funds, investment arms, high net worth - seek 20%+. Target profitable co.
- Growth investors
- buyout investors
• Public Equity Investors individuals and institutions 5-10%)
• Public Investment in Public Enterprise Investors. - private investments in public companies with holding periods
• Distressed Investors - invest in struggling or failing co.’s Seek greater than 20%+”
Basic rights of securities
”- voting: include BOD, div policies, acquisitions/ mergers, new issues
- dividends
- claim on portion of co.’s assets”
Additional features to modify the risk profile of equity
”- Conversion rights
- Redemption: at right of investor
- Retraction: at right of co. “
Common derivative securities
” - Options: gives option holder the right to obtain from the seller a asset at a given day. Include call(buy)/ put (sell)
- Warrants: issued by co. issued as opportunity to acquire stock at fixed price in future. increase attractiveness
- Rights: right to purchase at a specified price by a date. Often issued in the money. “
Public equity investment types?
”- Initial public offering
- follow-on offering: following IPO raising additional equity or liquidity for original investors
- junior stock exchanges: conduit for smaller companies to go public.
- reverse takeovers: shell companies taken over by active companies avoiding IPO.”
Underwriting IPO
”- All or none: set amount or none
- Best efforts: sell as much as possible at agreed price
- Firm commitment: firm contract where underwriter guarantees issue by assuming risk of IPO.
- Fixed price
- Book building- range of prices offered and investors make bids which balances supply and demand”
Distressed investment strategies
”- Turnaround equity :investing Provide capital for equity at discount
- Loan to Own: Invest in debt if company fails gain through restructure.
- Distressed control: Purchase outstanding debt at discount.”
