Note on Private Equity, Venture Capital, Angel Funding, Series A funding

What is Private Equity:

 ·         An asset class that involves value enhancement and high returns generation by sharing business expertise of the Investor complementing the Entrepreneur
·         Offer greater opportunity to exercise control over investments as compared with other passive asset classes like equities, mutual fund, real estate, commodities, fixed income
·         Equity investments in relatively mature, primarily unlisted companies requiring growth capital
·         Each investment is backed by an investment thesis which plays out over a period of three to five years

Types of Private Equity and stage of investment: 

·         Buyout

These funds provide equity capital to mature firms in need of capital or ownership transition. Transactions tend to have a layer of debt in their financing. Small and mid-sized buyout transactions tend to have lower proportions of debt in their capital structure relative to their large and mega-sized counterparts.

·         Venture Capital

These funds provide equity capital to start-ups and companies in the early stages of growth. Portfolio companies tend to be focused upon technology, healthcare or “green” technologies. These companies tend to exhibit high levels of growth, with the potential to become profitable businesses. The immaturity of these businesses means that some will inevitably fail. However, within a successful venture capital fund, any failures will typically be counterbalanced by a number of extremely profitable investments.

·         Growth Capital

These funds provide expansion capital to enable a company to scale a business. Investments tend to be made after the early stages of a company’s life. Returns are largely dependent upon cash flow growth.

·         Special Situations

These funds tend to invest in mezzanine or mid-layer debt capital, which provides more protection than equity financing in the event of default. These funds can aim to achieve equity-like returns via the use of warrants and equity-like features. Mezzanine debt tends to exhibit lower risk and return features than other, purely equity-based, private equity stages.

The term special situations also includes distressed debt and funds specializing in energy and turnaround investments.

Key differences between other funds and PE:

Venture Capital
Private Equity
Stage of company
At all stages
Level of Risk
Assessment of Focus
Mostly Technology
Investment Size
< $ 10 m
> $ 10 m
> $ 50 m
> $ 5 m

PE Investment Process:

·         Structuring the Business

·         Preparation of Business Plan and marketing Collateral

·         Short list and evince interest from the investors

·         Structuring, Valuation and Negotiation

·         Obtain Term sheet

·         Due Diligence

·         Definitive Agreement

·         Closing Formalities

·         Funding

Advantages of PE:

     ·         Meet Financial Objective

·         Corporate Governance

·         Networking and Global Integration

·         Operational Orientation

·         Corporate Strategies

·         Long Term Capital Commitment

·         Easier access other source of finance

·         Experience & Expertise in Risk Reward Analysis and Capital allocation

·         Build Confidence in – Customers, Employees, Suppliers, Banks & other lending institution and Markets

·         Relatively less expensive fund raising exercise in comparison to IPO

Disadvantages of PE:

·         Raising Private Equity finance is very demanding, time consuming; at times the business may suffer if promoter devotes more time for the transaction

·         Depending on the investor, promoters may lose a certain amount of power to make management decisions

·         Will have to invest management time to provide regular information for the investor to monitor

·         Might create conflict or differing opinion in long‐term strategy due to pressures of EXIT from the investor

·         The cost of complying with regulations could be relatively higher

·         Non‐alignment of Interest of fund manager on the board and entrepreneur could hamper the growth of company

DEFINITION of 'Series A Financing'

The first round of financing undergone for a new business venture after seed capital. Generally, this is the first time that company ownership is offered to external investors. Series A financing may be provided in the form of preferred stock and may offer anti-dilution provisions in the event that further financing through preferred or common stock occurs in the future.

Series A financing tends to occur when the company is generating some revenue from its business model, but rarely will the business be generating net profits at this point. Most series A investors will be venture capital funds or angel investors who are willing to accept the high levels of risk found in these early-stage company investments.

As an enterprise grows and requires additional capital, the subsequent rounds of preferred stock issued to investors are called Series B, Series C, and so on. This allows investors in those subsequent rounds of financing to know where they stand in the hierarchy of claims to future profits. Typically, the business is revalued before each round of financing, so terms of conversion may be vastly different for different rounds depending on the valuation of the company at each stage.