Venture capital is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from high-net-worth investors, investment banks, and other financial institutions. The potential for above-average returns is an attractive payoff for venture capital investors. For new companies or ventures that have limited operating history (under two years), venture capital funding is increasingly becoming a popular, sometimes essential, source for raising capital especially if they lack access to capital markets, bank loans, or other debt instruments.
A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money (typically 10% equity & 90% debt) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. Importantly, the purpose of LBOs is to allow companies to make large acquisitions without having to commit large amounts of capital. Due to the high debt/equity ratio, most of the bonds used to finance these buyouts are of non-investment grade quality, also known as “junk” bonds.
Private investment in public equity (PIPE) is the buying of shares of publicly traded stock at a price below the current market value (CMV) per share. A publicly-traded company may utilize a PIPE when securing funds for working capital to finance day-to-day operations, expansion, or acquisitions. The company may create new stock shares or use some from its supply, but the equities never go on sale on a stock exchange. Rather, large investors such as investment firms, mutual funds, and accredited investors purchase the company's stock in a private placement. One advantage to the issuer is that they typically obtain such funding within 2 to 3 weeks, rather than waiting several months or longer, as it would with a secondary stock offering.
Special situation investment opportunities can take many forms, such as capital structure dislocations, litigations, distressed assets, and any other event that may affect the company’s short-term prospects. Investors attempt to profit from a potential rise in valuation that the special situation presents. Alternately, it can also be an attempt to profit from the anticipated recovery of an asset whose value has been depressed by a special situation. A special situation can surface in any industry during any point in an economic cycle.
Angel investing refers to investments made very early in a firm's life, often the "idea" stage, and the investment funds are used for business plans and assessing market potential. The funding source is usually individuals ("angels") rather than venture capital funds, who provide financial backing typically in exchange for ownership equity in the company.
The seed funding stage typically refers to investments made for product development, marketing, and market research. This is typically the stage during which venture capital funds make initial investments, through ordinary or convertible preferred shares.
Early-stage funding refers to investments made to fund initial commercial production and sales. Later stage investment refers to the stage of development where a company already has production and sales and is operating as a commercial entity. Investment funds provided at this stage are typically used for expansion of production and/or increasing sales though an expanded marketing campaign.
Mezzanine-stage financing refers to capital provided to prepare the firm for an IPO. The term here refers to the timing of the financing (between private company and public company) rather than the type of financing which we are vastly experienced in. Mezzanine financing involves the hybrid of debt and equity to fund growth projects or to help with acquisitions with short-to medium-term time horizons.
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