Professional Documents
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Investment banks invest directly into companies through venture capital and private equity investments
Private companies are valuated using multiple methods: Comparables, Discounted Cash Flow, Option Valuation and Venture Capital Method
1. Venture Capital
- Make equity investment and recoup investment through the company going public or merger & acquisition
- Venture capitalist expects high return and takes an active advisory role
- Target companies are privately owned, high growth potential and have a strong management team
- s
2. Leverage Buyouts
- Uses debt to finance the majority of the purchase price
- High leverage enhances investment returns
- Target companies have low leverage, lots of tangible asset and in financial distress
Venture Capital and Leveraged Buyout enable investors to directly invest
into private companies
Target Company - High growth potential - Low leverage Primary Aim: Diversified
- Strong management team - Lots of tangible asset Portfolio
- In financial distress
1. Initial Public Offering (IPO) 1. Initial Public Offering (IPO) Fund managers construct
Exit Strategy 2. Merger & Acquisition (M&A) 2. Merger & Acquisition (M&A) diversified portfolio with limited
3. Bankruptcy 3. Bankruptcy partnerships with venture
capital funds and leveraged
buyout firms
- Sophisticated investors - Senior & Subordinated Debt
Form of Financing
- Equity - Equity
Information on private companies are limited, early stage companies may experience negative cash flow and earnings
Transaction Company Present Value Follow-on investment Uncertain cash flow & profit
- Acquisition Multiple - Projection of sales and - Black-Scholes Model - Discount terminal value at
- Market Price Multiple operating profits - Incorporates flexibility to wait, target rate of return (TRR)
- Scenario analysis is learn and make decision - Terminal value determined
recommended using price-earning ratio
- More calculations for required
ownership percentage
- Need comparable companies - Highly dependant on - Real-world situation may be - cash flows are uncertain and
- Difference between assumptions too complicated to be fully may be negative
accounting policies captured
Generic, used for many investment decisions More relevant for private equity investment
Venture Capital funds has a life cycle of 10-12 years, investors exit through complete
liquidation of the portfolio
Based on capital
contribution
3 - 7 yr
Loss Allocation
Seed Capital Start-Up Financing 1st Financing 2nd Stage Financing 3rd Stage Financing
Innovative Concept Product Development Marketable Prototype Finance Working Capital Major Expansion
- Establish feasibility of - Product development - Start operations - Growth stage - Increase in sales
concept - Initial phrase of marketing - Development of product - Finance goods in - Company becomes
and infrastructure process, inventories etc profitable