Venture capital

Venture capital is the term used when investors buy part of a company. A venture capitalist places money in a company that is high risk and has a high growth. The investment is usually for a period of five to seven years. The investor will expect a return on his money either by the sale of the company or by offering to sell shares in the company to the public. When investing venture capital, the investor may want receive a percentage of the companys equity, and may also wish to have a position on the directors board. Always remember that an investor who agrees to place venture capital in a company is looking to make a healthy return. She can demand repayment by the sale of the company, asking for her funds back or renegotiating the original deal. There are three different types of venture capital investment. Early stage financing includes seed financing, start-up financing and first stage financing. Seed financing refers to a small amount of venture capital given to an entrepreneur or inventor who wishes to start a business. It may be used to build a management team, for market research or to develop a business plan. Start up financing refers to venture capital that is given when a business has been operating for less than a year. Their product will not have been sold commercially yet, and they will just be ready to start doing so. First stage financing is used when companies wish to expand their capital and to proceed full scale and enter the public business arena. Another type of venture capital investment is expansion financing. This covers second and third stage financing and bridge financing. Second stage financing is an investment used to expand a company that is already on its feet. The company is trading and has growing accounts and inventories, although it may not yet be showing a profit. Third stage financing is an investment to companies that are breaking even or becoming profitable. The venture capital is used to expand the business. It may be used in the acquisition of real estate or for further in-depth product development. Bridge financing covers a variety of different meanings. It is a short term, interest only investment. It is used when company restructuring is taking place. The money can also be used if an initial investor wants to liquidate his position and sell his stock. Another common form of venture capital is acquisition financing, in which the investment is used to acquire a percentage or the whole of another company. Venture capital can also be used by a management group to buy out another a line of products or business, regardless of their stage of development. The company they buy out can either be a private or a public company.

Venture capital (also known as VC or Venture) is a type of private equity capital typically provided for early-stage, high-potential, growth companies in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company. Venture capital investments are generally made as cash in exchange for shares in the invested company. It is typical for venture capital investors to identify and back companies in high technology industries such as biotechnology and ICT (information and communication technology). Venture capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms. Venture capital firms typically comprise small teams with technology backgrounds (scientists, researchers) or those with business training or deep industry experience. A core skill within VC is the ability to identify novel technologies that have the potential to generate high commercial returns at an early stage. By definition, VCs also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital (thereby differentiating VC from buy out private equity which typically invest in companies with proven revenue), and thereby potentially realizing much higher rates of returns. Inherent in realizing abnormally high rates of returns is the risk of losing all of one's investment in a given startup company. As a consequence, most venture capital investments are done in a pool format where several investors combine their investments into one large fund that invests in many different startup companies. By investing in the pool format the investors are spreading out their risk to many different investments versus taking the chance of putting all of their money in one start up firm. A venture capitalist (also known as a VC) is a person or investment firm that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments. A venture capital fund refers to a pooled investment vehicle (often an LP or LLC) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. Venture capital is also associated with job creation, the knowledge economy and used as a proxy measure of innovation within an economic sector or geography. Venture capital is most attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership (and consequently value).

Young companies wishing to raise venture capital require a combination of extremely rare yet sought after qualities, such as innovative technology, potential for rapid growth, a welldeveloped business model, and an impressive management team. VCs typically reject 98% of opportunities presented to them, reflecting the rarity of this combination.

Types of Venture Capital

There are several types of venture capital that are extremely crucial in the context of the modern day business world. The types of venture capital are classified as per the purpose and time of their application. The three principal types of venture capital are early stage financing, expansion financing and acquisition/buyout financing. Types of Venture Capital There are three major types of venture capitalearly stage financing, expansion financing and acquisition or buyout financing. The various types of venture capital are classified as per their applications at various stages of a business. Early Stage Financing Early stage financing has three sub divisions seed financing, start up financing and first stage financing. Seed financing is basically a small amount that an entrepreneur receives for the purpose of being eligible for a start up loan. Start up financing is given to companies for the purpose of finishing the development of products and services. However, this form of venture capital may also be used for initial marketing as well. Companies that have spent all their starting capital and need finance for beginning business activities at the full-scale are the major beneficiaries of the First Stage Financing. Expansion Financing Expansion financing may be categorized into second-stage financing, bridge financing and third stage financing or mezzanine financing. Second-stage financing is provided to companies for the purpose of beginning their expansion. Third-stage financing is also known as mezzanine financing. It is provided basically for the purpose of assisting a particular company to expand in a major way. Bridge financing is useful in many ways. It may be provided as a short term interest only finance option as well as a form of monetary assistance to companies that employ the Initial Public Offers as a major business strategy.

Acquisition or Buyout Financing Acquisition or buyout financing is categorized into acquisition finance and management or leveraged buyout financing. Acquisition financing assists a company to acquire certain parts or an entire company. Management or leveraged buyout financing helps a particular management group to obtain a particular product of another company.

PRIVATE EQUITY
Private equity is a source of investment capital from high net worth individuals and institutions for the purpose of investing and acquiring equity ownership in companies. Partners at private equity firms raise funds and manage these monies for the purpose of yielding favorable returns for their shareholder clients, typically with an investment horizon between four and seven years. These funds can be used in the purchase of shares of private companies, or in public companies that eventually become delisted from public stock exchanges under go-private deals. The minimum amount of capital required for investors can vary depending on the firm and fund raised. Some funds have a $250,000 minimum investment requirement; others can require millions of dollars. Private equity fund is a pooled investment vehicle used for making investments in various equity (and to a lesser extent debt) securities according to one of the investment strategies associated with private equity. Private equity funds are typically limited partnerships with a fixed term of 10 years (often with annual extensions). At inception, institutional investors make an unfunded commitment to the limited partnership, which is then drawn over the term of the fund. A private equity fund is raised and managed by investment professionals of a specific private equity firm (the general partner and investment advisor). Typically, a single private equity firm will manage a series of distinct private equity funds and will attempt to raise a new fund every 3 to 5 years as the previous fund is fully invested. A private equity fund typically makes investments in companies (known as portfolio companies). These portfolio company investments are funded with the capital rose from LPs, and may be partially or substantially financed by debt. Some private equity investment transactions can be highly leveraged with debt financing hence the acronym LBO for leveraged buy-out. The cash flow from the portfolio company usually provides the source for the repayment of such debt. Such LBO Financing most often comes from commercial banks, although other financial institutions, such as hedge funds and mezzanine funds, may also provide financing. Since mid-

2007 debt financing has become much more difficult to obtain for private equity funds than in previous years. LBO funds commonly acquire most of the equity interests or assets of the portfolio company through a newly-created special purpose acquisition subsidiary controlled by the fund, and sometimes as a consortium of several like-minded funds. Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity. Capital for private equity is raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet The size of the private equity market has grown steadily since the 1970s. Private equity firms will sometimes pool funds together to take very large public companies private. Many private equity firms conduct what are known as leveraged buyouts (LBOs), where large amounts of debt are issued to fund a large purchase. Private equity firms will then try to improve the financial results and prospects of the company in the hope of reselling the company to another firm or cashing out via an IPO.

Diff. between VC and PE

Technically speaking there is no substantial difference between VC & PE investments. PE is a asset class which includes VC, hedge funds, buyouts etc. VC investments are generally in the startup companies with the innovative idea of doing business. There could be a strong growth story ahead but the same time high risk proportionally. Eg- The VC investor exited their investments in websites during the online boom before 2000. PE invests in the companies with the consistent record of revenue and in later stage or the companies with the strong financial base. Considering the growth stage of companies and their financing reasons, the financial partnership investments can be made at different stages, like seed financing, start-up financing, early stage financing, expansion financing, mezzanine financing, LBO and MBO. These stages sometimes mark the distinction between venture capital and private equity investments. Although the differences between venture capital and private equity investments are not apparent in many cases, seed, start-up or early stage companies with a business or product development plan are generally financed by venture capital funds whereas private equity funds prefer investments to ongoing businesses at later stages of growth via mezzanine or expansion financing. Private equity funds seek companies, which have reached a certain size (revenues exceeding $10m in Turkey), enjoy high operating profit, realize rapid growth, hold considerable market share, and create significant entry barriers in their sectors. XXX

Bridge financing involves the extension of an interim loan that allows the borrower to maintain financial stability for a short time, in anticipation of finalizing arrangements for a long-term loan. Sometimes referred to as a swing loan, bridge financing is often used in real estate deals, as well as in some business operations. Here is some information on how bridge financing works, as well as a couple of examples of when bridge financing may be desirable. Configured to literally function as a financial bridge between available finances today and what is anticipated to accrue in a short time, the concept of bridge financing allows financial transactions to continue without being placed into a holding pattern while waiting for available funding. Because bridge financing is understood to be a short-term solution, the expectation is that long-term credit will be approved within a matter of weeks or months. As with any type of loan situation, the borrower has to demonstrate a reasonable ability to repay the short-term loan, as well as meeting eligibility requirements for obtaining long term financing. The most common use of bridge financing occurs within the real estate industry. It is not unusual for persons who are purchasing a new home may find that there is a lag between being approved for the mortgage on the new property before their previous home has sold. Bridge financing steps into the gap, providing the homeowner with finance support in the event that the new property goes through closing before the equity in the old property becomes available for application to the mortgage. This allows the homeowner to move forward with taking possession of the new property. Once the older property is sold and the deal is closed, the proceeds can be used to pay off the short-term loan created with bridge financing and apply the balance to the new mortgage. Companies may also engage in bridge financing. The application is similar to the example of purchasing a new home. Businesses that are able to demonstrate a reasonable expectation of having resources to engage in long term financing efforts within a short period of time may obtain bridge financing to continue operations until the resources are available to serve as collateral for long-term financing. This process has helped many companies to be able to purchase new equipment and buildings for operations, without any disruption or cutbacks needed in the usual and standard operations already in place.

Adventure capital is funding which is provided for humanitarian purposes. The person who provides such capital still expects to see a return on it, but believes in investing in humanitarian causes to further social progress while also making money. Amounts from small to large can be considered adventure capital and there are a number of ways in which people may be involved in contributing capital to causes such as development, humanitarian aid, and community endeavors.

Some large investors dedicate a portion of their funds to humanitarian causes as an act of charity or service. Firms often invest in such endeavors because they wish to improve their public image. Companies which invest in humanitarian service demonstrate that they are interested in improving communities in addition to making money. Very large companies and wealthy

individuals may establish separate foundations which provide adventure capital to organizations working on humanitarian assistance projects. People who invest on a smaller level can also make adventure capital investments. Some people may utilize this investment technique as a way of providing charitable assistance while also making some money, and some people believe that investing in humanitarian assistance does more good than simply donating. Investment schemes often concentrate on empowering the recipients of the assistance so that they can build stronger communities, and this provides long term benefits. A classic example of adventure capital is micro financing, also known as microcredit. In this type of lending, people in the developing world are provided with very small loans which they can use to start projects. Budding entrepreneurs sometimes do not need very much money to get started and micro financing helps them establish businesses or community projects. Often, the debt is split among a number of small investors to reduce the risks to investors, and the rate of repayment overall is quite high. People can participate in microfinance endeavors by working with companies which facilitate meet ups between borrowers and lenders.

Seed capital is money that is invested in a project or business that is in the process of being launched, or is in the early stages of its active operation. Sometimes referred to as seed money, seed capital is used to cover all expenses associated with the project until it has begun to generate revenue. Once the business or project becomes self-sustaining, investors are often paid back both the principal amount and an agreed upon amount of interest, an arrangement that allows everyone concerned to profit from the venture.

Seed financing is a common approach to starting a new business. Often, a single investor does not provide the total amount of investment money needed for the startup. Instead, the seed capital is generated by the participation of a number of individuals or other entities that contribute small portions of the overall capital required. This approach helps to minimize the risk to each investor, and makes it easier to allow the company a longer period of time to become established and begin generating revenue. The repayment of seed capital may involve a simple arrangement in which the borrower repays the lender over time, including some amount of interest along with the principal. In other situations, the new company may offer investors shares of stock, once the business has reached a point where issuing stock become viable. Depending on the structure of the agreement governing the receipt of the seed capital, investors may have the option of being compensated in part by cash payments and by receiving a limited number of shares. As with many types of investment, seed capital funding does come with some amount of risk. In the event that the new venture fails to reach a stage where it generates revenue and ultimately begins to be profitable, investors in the project may lose part or even all of the seed money. For

this reason, it is important for investors to look closely at several aspects of the proposed operation. This includes how the venture is organized, the level of efficiency associated with the overall operation, and the viability of the business plan that serves as the blueprint for the venture.

TERMINOLOGIES
Angel investor : A person who provides backing to very early-stage businesses or business concepts. Angel investors are typically entrepreneurs who have become wealthy, often in technology-related industries. Board seats : Venture firms often acquire positions on the board of directors of their portfolio companies. A board seat gives a venture firm a means of monitoring and managing a company they invest in. Bridge financing : As the name implies, bridge financing is intended as temporary funding that eventually will be replaced with permanent capital. In some cases, lenders will provide buyout firms and venture capital firms with bridge loans so that they can begin investing, before they have closed on capital for their funds. Likewise, a buyout or venture firm might provide a portfolio company with temporary financing until permanent financing is in place. Capital take-down : The schedule by which the general partner of a fund draws down capital from the limited partners to be used for investments. Most general partners today call down capital only as they require it, rather than in pre-set amounts according to a rigid timetable. Carried interest : The general partners share of the profits generated through a private equity fund. The carried interest, rather than the management fee, is designed to be the general partners chief incentive to strong performance. A 20 percent carried interest meaning that the remaining 80 percent reverts to the limited partners has been the industry norm, although some firms now take 25 percent or even 30 percent, based on very strong performance on past funds. Catch-up : This is a common term of the private equity partnership agreement. Once the general partner provides its limited partners with their preferred return, if any, it then typically enters a catch-up period in which it receives the majority or all of the profits until the agreed upon profit-split, as determined by the carried interest, is reached. Co-investor : Although used loosely to describe any two parties that invest alongside each other in the same company, this term has a special meaning in relation to limited partners in a fund. By having co-investment rights, a limited partner in a fund can invest directly in a company also backed by the fund managers itself. In this way, the limited partner ends up with two separate stakes in the company; one, indirectly, through the private equity fund to which the limited partner has contributed; another, through its direct investment. Some private equity firms offer co-investment rights to encourage limited partners to invest in their funds. Consolidation : Also called a leveraged rollup, this is an investment strategy in which an LBO firm acquires a series of companies in the same or complementary fields, with the goal of

becoming a dominant regional or nationwide player in that industry. In some cases, a holding company will be created, into which the various acquisitions will be folded. In other cases, an initial acquisitions may serve as the platform through which the other acquisitions will be made. Distributions : Cash or stock returned to the limited partners after the general partner has exited from an investment. Stock distributions are sometimes referred to as in-kind distributions. The partnership agreement governs the timing of distributions to the limited partner, as well as how any profits are divided among the limited partners and the general partner. Due diligence : A process of inspection that a venture capital or other private equity firm carries out before closing on a deal. Venture capitalists, for example, might review a companys accounting practices and managerial structure. Evergreen fund : A fund in which returns generated on investments are automatically returned to the general pool, with the aim of keeping a continuous supply of capital on hand for investments. Exit : The means by which a private equity firm realizes a return on its investment. For venture capitalists, this typically comes when a portfolio company goes public, or when it merges with, or is acquired by, another company. Fund of funds : A private equity fund that, instead of being used to make direct investments in companies, is distributed among a number of other private equity fund managers, who in turn invest the capital directly. Funds of funds often give individual limited partners access to funds from which they would otherwise be excluded. Also, by spreading the capital more widely, the risk to limited partners is reduced. Fund raising : The process through which a firm solicits financial commitments from limited partners for a private equity fund. Firms typically set a target when they begin raising the fund, and ultimately announce that the fund has closed at such-and-such amount, meaning that no additional capital will be accepted. Sometimes, however, the firms distinguish between interim closings (first closings, second closings, etc.) and final closings. The term cap is used to describe the maximum amount of capital a firm is willing to accept into its fund. General partner : In addition to being used as a title for top-ranking partners at a private equity firm, general partner (or general partnership) is used to distinguish the firm managing the private equity fund from the limited partners, the individual or institutional investors who contribute to the fund. General partner clawback : This is a common term of the private equity partnership agreement. To the extent that the general partner receives more than its fair share of profits, as determined by the carried interest, the general partner clawback holds the individual partners responsible for paying back the limited partners what they are owed. General partner contribution : The amount of capital that the fund manager contributes to its own fund in the same way that a limited partner does. This is an important way in which limited partners can ensure that their interests are aligned with those of the general partner. The U.S. Department of Treasury recently removed the legal requirement of the general partner to

contribute at least one percent of fund capital. However, a one percent general partner contribution remains common, particularly among venture capital funds. Incubator : An entity designed to nurture business concepts or new technologies to the point that they become attractive to venture capitalists. An incubator typically provides both physical space and some or all of the services legal, managerial, technical needed for a business concept to be developed. Incubators often are backed by venture firms, which use them to generate early-stage investment opportunities. Initial public offering (IPO) : When a privately held company owned, for example, by its founders and its venture capital investors offers shares of its stock to the public. Lead investor : The firm or individual that organizes a round of financing, and usually contributes the largest amount of capital to the deal. Leveraged buyout (LBO) : The acquisition of a company in which the purchase is leveraged through loan financing, rather than being paid for entirely with equity funding. The assets of the company being acquired are put up as collateral to secure the loan. Limited partners : Institutions or individuals who contribute capital to a private equity fund. Limited partners typically are pension funds, private foundations, and university endowments. However, private equity firms themselves may serve as limited partners in other firms funds, as, for example, when a large buyout firm channels money to a fund managed by a venture capital firm. See also General partner. Limited partner clawback : This is a common term of the private equity partnership agreement. It is intended to protect the general partner against future claims, should the general partner or the limited partnership become the subject of a lawsuit. Under this provision, a funds limited partners commit to pay for any legal judgment imposed upon the limited partnership or the general partner. Typically, this clause includes limitations on the timing or amount of the judgment, such as that it cannot exceed the limited partners committed capital to the fund. Management buyout : The acquisition of a company by its management, often with the assistance of a private equity investor. Management fee : This annual fee, typically a percentage of limited partner commitments to the fund, is meant to cover the basic costs of running and administering a fund. Management fees tend to run in the 1.5 percent to 2.5 percent range, and often scale down in the later years of a partnership to reflect the reduced work load of the general partner. The management fee is not intended to be the primary source of incentive compensation for the investment team. That is the job of the carried interest. Market capitalization : The overall value of a publicly traded company, derived by multiplying the total number of shares by the share price. Mezzanine fund : Used to provide a middle layer of financing in some leveraged buyouts, subordinated to the senior debt layer, but above the equity layer. Mezzanine financing shares characteristics of both debt and equity financing.

PIPEs : An acronym for private investing in public equities. See Private placement. Placement agent : An outside firm hired by a general partner to market its fund to institutional investors. The general partner typically pays a two percent fee of the capital raised from new sources by the placement agent. Portfolio company : A company in which a venture capital firm or buyout firm invests. All of the companies currently backed by a private equity firm can be spoken of as the firms portfolio. Preferred return : The preferred return is a minimum annual internal rate of return sometimes promised to the limited partners before the general partner shares in profits. In effect, the preferred return ensures that the general partner shares in the profits of the partnership only to the extent that the investments perform well. Once the preferred return is met, there is often a catchup period in which the general partner receives the majority or all of the profits until it reaches the agreed upon profit-split, as determined by the carried interest. Preferred stock : This is one of the most common classes of shares for venture capital and buyout firms to hold. Preferred stock pays dividends at a set rate, and holders get paid before common stock holders in the event of a liquidation. Convertible preferred stock is convertible into common stock at a pre-determined price per share. Private equity : Equity capital invested in private companies. Typically, references to private equity encompasses both early stage (venture) and later stage (buyouts) investing. Private equity advisor : An outside firm hired by an institutional investor, such as a state retirement system, to handle the selection, negotiation and monitoring of private equity funds. An advisory assignment can be non-discretionary, in which the institutional investor retains the final say on investment decisions, or discretionary, in which the advisor has the legal authority to make investment decisions on the clients behalf. Private placement : This term is used specifically to denote a private investment in a company that is publicly held. Private equity firms that invest in publicly traded companies sometimes use the acronym PIPEs to describe the activity private investing in public equities. Occasionally, private investors will acquire 100 percent of the shares of a publicly traded company, a process known as a going-private deal. Qualified Purchaser : See detail of Qualified Purchaser. Seed-stage fund : A pool of money used to back companies too small to attract mainstream venture firms. Small Business Investment Company : A licensed member of a U.S. Small Business Administration program that entitles an investment firm to obtain matching federal loans for its private equity investments. Typically, a firm will have access to $2 in credit for every $1 that it invests in a company. If an SBIC raises $20 million, it will have access to up to $40 million in low-interest loans, drawn down on a deal-by-deal basis.

Spin out : A division or subsidiary of a company that becomes an independent business. Typically, private equity investors will provide the necessary capital to allow the division to spin out on its own; the parent company may retain a minority stake. Strategic investment : An investment that a corporation or affiliated firm makes in a young company that offers to bring something of value to the corporation itself. The aim may be to gain access to a particular product or technology that the start-up company is developing, or to support young companies that could become customers for the corporations products. In venture capital rounds, strategic investors typically are sometimes distinguished from financial investors venture capitalists and others who invest primarily with the aim of generating a large return on their investment. Venture capital rounds : Portfolio companies typically receive several rounds of venture capital before going public. The first round is usually smaller than subsequent rounds, and likely to involve fewer investors. Note that first-round funding does not necessarily mean that the company has received no previous outside backing. The term first round is still appropriate if previous backing consisted of, say, $500,000 from an angel investor. A first round typically is the first round involving participation by a venture capital firm. Warrant : An option to purchase stock in a company, typically exercised over an extended period.

Acquisition

Any deal where the bidder ends up with 50% or more of the target is called an acquisition. A Bidder is the entity that makes the purchase or the offer to purchase. The Target is the entity being purchased, or the entity in which a stake is being purchased. The Vendor is the entity that sells or disposes of the target entity. A combination of management buy-out and buy-in where the team buying the business includes both existing management and new managers. The generic name for a tradeable loan security issued by governments and companies as a means of raising capital. Government bonds are known as gilts or Treasury Stock. A legal document which formalises the lender's charge over the assets of the company. This may include bank loans, overdrafts, and lease financing and may be long or short term, secured or unsecured. The lender receives interest at an agreed rate and in the event that this is not paid may be entitled to take control of and sell certain assets owned by the company. A lender does not, however, generally have a share in the ownership of the business. Also known as expansion capital. This is venture capital financing used for

BIMBO Bond

Debenture Debt

Development capital

expansion of an already established company. Due Diligence This is one of the main processes which takes place before a transaction (e.g. MBO/MBI) is completed. The aim is to ensure that there is nothing which contradicts the financier's understanding of the current state and potential of the business. The individual elements of due diligence may include commercial due diligence (markets, product and customers), a market report (marketing study), an accountants report (trading record, net asset and taxation position) and legal due diligence (implications of litigation, tittle to assets and intellectual property issues). Earnings before interest and tax. Earnings before interest, tax, depreciation and amortisation. EBITDA is measure of cash flow. By excluding interest, taxes, depreciation and amortisation the amount of money a company is bringing in can be clearly seen. Equity is the term used to describe shares in a business conveying ownership of that business. The shareholders may be entitled to dividends. If a business fails, the shareholders will only receive a distribution on winding up after the lenders and creditors have been paid. An equity investment, therefore, has a higher risk attached to it than that facing a bank lender and thus the return that the shareholders demand on their money is typically higher. The most common source of equity finance for buy-outs is the venture capital market.

EBIT EBITDA

Equity

Exit (Realisation) The point at which the institutional investors realise their investment. Venture capitalists may, depending on the business and their own situation, look to achieve an exit in anything from a few months to 10 years. Exits generally occur via trade sales, secondary management buy-outs and flotation on the stock market or by write-off if the investment ends in receivership. Goodwill The difference between the price which is paid for a business and the value of its assets.

High Yield (Junk) Bonds which offer high rates of interest but with correspondingly higher risk Bonds attached to the capital. IBO An institutional buy-out. This is when a private equity house acquires a business directly from the vendor. Often the target's management will take a small stake. Initial Public Offer. Shares in a company have been placed on a stock exchange. An IPO is always just the first time a company's shares are listed if a company has a listing on another market or in another country, then the listing is not an IPO, merely a secondary, or additional, listing.

IPO

IRR

Internal rate of return. The average annual compound rate of return received by an investor over the life of their investment. This is a key indicator used by institutions in appraising their investments. Two or more companies that form a new venture. Leveraged Buy-Out, an American term. The takeover of a company by investors who use the company's own assets as collateral to raise the money which finances the bid. Normally the loans are then repaid either from the company's cash flow, or by selling some of its assets. Leveraged build up. A venture capital firm builds up the company it owns by acquiring smaller companies to amalgamate into the larger firm, thus increasing the total value of its investments through synergies between the acquired companies. A form of vendor finance or deferred payment, in which the purchaser acts as a borrower, agreeing to make payments to the holder of the transferable loan note at a specified future date. Management Buy-In. The company is sold to a combination of a new team of managers, with the new management team taking a majority stake. This often happens with family firms who have no one to pass the company on to, so they sell the company to a management team. The old owners sometimes retain a small stake. The management team often includes a venture capital firm. Management Buy-Out. This is the purchase of a business by its management, usually in co-operation with outside financiers (e.g. private equity providers). Buy-outs vary in size, scope and complexity but the key feature is that the managers acquire an equity interest in their business, sometimes a controlling stake, for a relatively modest personal investment. The existing owners sell most or usually all of their investment to the managers and their co-investors. A true merger is actually quite rare. Many acquisitions are described as mergers but in a true merger, there is a one-for-one share swap, for shares in the new company. If the swap is not on equal terms then this is an acquisition. This is often used to bridge the gap between the secured debt a business can support, the available equity and the purchase price. Because of this, and because it normally ranks behind senior debt in priority of repayment, unsecured mezzanine debt commands a significantly higher rate of return than senior debt and often carries warrants (options to buy ordinary shares) to subscribe for ordinary shares. It ranks behind more formal borrowing contracts and is thus referred to as 'subordinated' or 'intermediate debt'.

Joint Venture LBO

LBU

Loan Note

MBI

MBO

Merger

Mezzanine Finance

Net asset value Newco

This is the value of the company based on the valuation of the assets less any liabilities that it has in its balance sheet. A new company formed to effect the buy-out by acquiring the operating subsidiaries.

Ordinary Shares Ordinary shareholders carry full rights to participate in the business through voting in general meetings. They are entitled to payment of a dividend out of profits and ultimately repayment of capital in the event of liquidation, but only after other claims have been met. As owners of the company the ordinary shareholders bear the greatest risk, but also enjoy the fruits of corporate success in the form of higher dividends and/or capital gains. PBIT PE ratio Profit before interest and tax. The Price Earnings ratio is one of the most commonly used measures of value in financial circles. It expresses the value in terms of a multiple of profits. For any company quoted on the Stock Exchange this figure can be easily calculated and is published daily in the Financial Times.

Preference shares These fall between debt and equity. They usually carry no voting rights and have preferential rights over ordinary shareholders regarding dividends and ultimate repayment of capital in the event of liquidation. Private equity Private equity is an increasingly widely used term in Europe and is generally interchangeable with venture capital, but some commentators (including CMBOR) use it to refer only to the management buy-out and buy-in investment sector. A government, council or other state-owned entity disposes of a company or stake in a company that it owns. The company, or part of the company, moves from public to private ownership. Individual or group of individuals purchasing a majority stake in a publicly quoted company.

Privatisation

Public buy-in

Public to private This involves the management or a private equity provider making an offer buy-out for the shares of a publicly quoted company, then taking the company private. Ratchet A mechanism whereby management's equity stake may be increased (or decreased) on the occurrence of various future events, typically when the institutional investor's returns exceed a particular target rate.

Reverse takeover An unlisted company acquires a smaller listed company, thus achieving a stock market listing 'through the back door'. The acquisition is carried out by the listed company issuing new shares in order to acquire the unlisted

company. As the unlisted company is larger than the listed one, the bidder has to issue so many new shares that the owners of the unlisted company end up with a controlling stake in the listed company. Secondary out buy- The management team in conjunction with a private equity funder acquire the business, allowing the existing private equity supplier to exit from its investment. Most companies need more than the initial injection of capital, whether to enable them to expand into new markets, develop more production capacity, or to overcome temporary problems. There can be several rounds of financing. Debt provided by a bank, usually secured and ranking ahead of other loans and borrowings in the event of a winding up. Certificates or book entries representing ownership in a business. Capital used to establish a company from scratch or within the first few months of its existence. Risky but with huge potential returns for the very successful. Loans which rank after other debt. These loans will normally be repayable after other debt has been serviced and are thus more risky from the lender's point of view. Mezzanine finance is an example of a subordinated loan. Where an investment is too large, complex or risky, the lead investor may seek other financiers to share the investment. This process is known as syndication. A common method of exit is a sale to a trade buyer. This can either allow management to withdraw from the business, or it may open up the prospect of working in a larger enterprise. Can either be in the form of deferred loans from, or shares subscribed by, the vendor. The vendor may well take shares alongside the management in the new entity. This category of finance is generally used where the vendor's expectation of the value of the business is higher than that of management and the institutions backing them. Equity finance in an unquoted, and usually quite young, company to enable it to start up, expand or restructure its operations entirely. It's cheaper than bank finance initially because paying dividends can be deferred; it also provides a strategic partner - but it implies handing over some control, a share of earnings and decisions over future sales.

Second-round financing

Senior debt Shares Start-up capital

Subordinated loan Syndicated investment Trade sale

Vendor Finance

Venture capital

Warranties

and Legal confirmation given by the seller, regarding matters such as tax or

indemnities

contingent liabilities, to assure the buyer that any undisclosed liabilities that subsequently come to light will be settled by the seller.