Doing Deals in PE

Fundamentals of Private Equity and

Venture Capital
Private Equity and Venture Capital

 Institutional point of view: private equity is the provision of capital and

management expertise given to companies to create value and consequently
generate big capital gains after the deal

 Holding period: medium or logn

 Broad definition: Private equity is not public equity because it includes

investments realized outside the stock market only.

 The company in which the private equity is investing is called “Venture

Backed Company”
Differences between public equity and
private equity
Pricing Liquidity Monitoring
Public equity
Private equity
 In every deal of private equity it can be assessed that a strict relationship
between the investor and the entrepreneur is created.
 This is not found in any other financial institution.
 Characteristics
 Modification of shareholder composition
 Knowledge and nonfinancial support
 Predefined time horizon of the investment.
Four benefits of private equity deals
 Certification effect:
 Lemons market
 Signal quality
 Severe and detailed screening and only few companies overcome such steps.
 Network effect:
 They can share with the company a very strong network
 Knowledge effect:
 Specific competencies: Hard or Soft
 Hard skills: help in changing set of competencies
 Soft skills: support the mgmt.
 Financial effect:
 As shareholder
 Ease in future capital collection.
Difference between Corporate Finance
and Entrepreneurial Finance
Parameter Corporate Finance Entrepreneurial Finance
Focus
Reference for the
valuation
Collateral
Target return
Exit
Holding period
Financial institution
involvement
Flexibility
Difference between Private equity
finance and corporate finance
 Elements
 Interdependence between investment and financing decision
 Managerial involvement of outside investors
 Information problem and contract design
 Value to entrepreneur
 Legal and fiscal ad hoc rules
The map of equity investment : An
entrepreneur’s perspective
 Equity investment provides a firm’s specific financial needs if not the finance
necessary to actually start up a company.

 Four drivers to classify financial needs:

 Investment
 Profitability
 Cash flow
 Sales growth.
 Variables should be evaluated from a long term perspective
Stages of firm to classify financial needs

 Development
 Start up
 Early growth
 Expansion
 Mature age
 Crisis or decline
Clusters of investment within
Private Equity
Approaches to equity investment

 Traditional Approach  Firm Based Approach /Modern

Approach
 Based on relationship between firm’s
development and its financial needs  Evolved due to the competition and the
difficulty in matching a company’s
 Stages of equity investment are
needs with the activities of the private
equity investor.
 Seed financing
 Start up financing
 Three different investment categories
 Early stage financing
 Creation financing
 Expansion financing
 Replacement financing
 Expansion financing
 Vulture financing
 Change financing
Creation financing

 Supports a new economic venture from the original idea.

 Need for private equity finance emerges when an entrepreneur looks for
support when developing a new product, service or renewing an existing
production process.
 It includes all venture capital deals
Expansion financing

 All deals aiming at addressing problems with growth and the increasing size of
a firm.

 In-house growth path – Projects originate by sales development plans, rather

than production capacity expansion.
 External growth paths- projects are linked to M&A deals. Private equity
operators find their ideal partners or the best target company.
 Vertical or horizontal integration path – projects create a holding that
includes operative and complementary firms with similar supplied business
areas, technologies, customers etc.
Change Financing

 Funds operations that change a firm’s shareholder composition.

Main issues of investment clusters

 Every cluster is classified on the parameters

 Definition (agreement between the entrepreneur and financial institutions)
 Risk-Return profile ( according for the stage company; drivers : investment,
profitability, cashflow, sales growth)
 Critical issues (matching of the right company that is being financed with the most
appropriate financial institution)
 Managerial involvement within business venturing (financial institution’s
contribution to the growth of the firm and analyses the decision process; “Hands-
on” or “Hands Off”)
Private Equity Deals
Seed Financing

 Development of a new firm.

 To transform R&D projects into successful business companies or start ups.

 Risk is high
 Expected returns are impossible to calculate due to uncertainty of R&D
results.
 Eg. Biotech and high-technology projects

 Equity based financing is preferred.

 Role played by investors in not passive.
 Supportive role
Start-Up Financing

 Transforms R&D into a business idea, and start-up financing converts business
idea into a real operating company.

 Used to set up projects and launch production.

 Gamble for financier.
 It is not known to the investors that whether the market will support the idea
transforming it into a profitable business.
Early Stage Financing

 Essential when moving from the start-up to the real business life cycle.

 Objective: to create a stable and permanent organization

 All problems related to project, design, test and launch have been resolved.
 Expected IRR and the relative risk are high, because investments are already
made and there is no certainty about sales development.
Expansion Financing

 For companies that need or want to expand their business activity.

 For investor, risk in expansion financing is moderate, and depends on the

sector.
 Money is used to finance sales growth or to improve projects in known fields
so there is no risk due to uncertainty.

 Such projects do not require technical skills or industrial abilities, so these

deals may be funded by a very large number of financiers.
Replacement Financing

 Funds companies looking for strategic decisions associated with the

governance system and the firm’s status.

 ways:
 Listing on a stock exchange
 Substitution of shareholders
 Successions
 A new design for the company governance
Vulture Financing

 When a firm is financially distressed, private equity operators can offer what
is named vulture financing
PURPOSE:
 To restructure companies
 To exploit new strategic opportunities
 To regain credibility.

 It is very risky, as there is no guarantee that the business will be revitalized

by the survival plan.
Investing in the Early
Stages of a company
Venture Capital
Seed financing
Start up financing
Early growth financing
Early Stage Financing

 How and why the venture capitalist decides to invest in a business idea, that
has to be defined and planned before the company even exists ?

 Which venture capitalist to emphasize on to ?

Which venture capitalist to focus on ?

 Operate with pre-established and limited period of time

 Acquire only minority participation
 Define the return on the investment
 Manage their investment with a hands-in approach as they have to make sure
that their investment with eventually yield a return
 In the light of their investment profile, they usually protect themselves with
some tools that decrease the likelihood of a write off of the investment .
Seed Financing

 Participation in favor of a business idea for which the legal entity has not yet
founded.
 Employ Special Purpose Vehicle (SPV).

 Good performance of the financed project is affected by the following three

so called “golden rules of seed financing”.
 100/10/1 rule
 Sudden death risk
 Size of the market
Start up Financing

 Risk in investing in company at this stage is very high.

 Risk is based on launching a company built on a well founded business idea
and not on the gamble of discovering a new business idea.

 Risk depends on two variables:

 The total amount of the net financial requirement
 The time to reach the breakeven point of the activity financed.
Early Growth Financing

 Financing of the first phase of growth of a new company that has started
generating sales.
 Cash flow are low, but the need for cash is high.
 Investors do not exactly know how the company will turn out.
 Investor has to adopt a hands-on approach. If the investor thinks that the
company business model is based on good idea, but the business plan is still
not adequate, they help rewrite it.
Structure of venture capitalists in Early
Stage Financing
 Two types of organization structures are typically used :
 Business Angel
 Corporate Venture Capitalists
 Business Angel  Corporate Venture capital
 Private and informal investor  Executed by very large industrial
groups.
 Bring risk capital to SME
 Strengthen research and
 They sustain by networks that
development to continue high-tech
match them with companies to
evolution that has created
meet the demand and supply of
investment opportunities.
financial funds.
Four types of business angels

 Angels who sit on a working Board of Directors

 Angels who act as informal consultants
 Angels who are full or part time manager investors
 Angels who are investor owners.
Criteria to choose an investment
 Possibility of entry in new markets
 Cost advantages
 Unique technology
 Business idea easily understood by investors
 Opportunity to have fun from the investment
 High level of ROI linked with solid financial indicators
 Business idea that is both innovative and profitable
 Management teams with competences, good track records, ability to
commitment, desire to succeed
 Geographically close
 Clear exit strategy
Private investor motivation and criteria

 Return on investment
 Improved self image, self esteem and recognition
 Alleviating concerns and helping others
 Economic return before IPO stage
 Aptitude for high risk
Investments in Mature
Companies
 The financial goal at this time is to support the growth or the survival in
terms of revenue realized, products developed and markets and customers
serviced.

 Three elements that help in defining the financial resources needed to

sustan the development and growth of existing business: The demand of
financial resources made by the target company at this stage depends on :
 Its competitive capacity, measured in terms of turnover trend,
 The quantity of capital invested, which is connected with changes in the firm’s
industry
 Cash flows generated, which rely on the efficient structure of the costs and
revenues and the industry in which the firm competes.
Expansion financing
Replacement financing
Vulture financing
Expansion financing
Expansion financing

 Fourth cluster of private equity deals

 Covers manufacturing tool up and marketing commitment costs
 Builds or improves the necessary facilities
 Supports the working capital needs
 Provides capital to finance M&A strategy or campaign

 Money injected is used to fill in the gap between cashflow and money
needed.
Type of growth covered

 Internal growth:
 Increase in production capacity
 Internationalization or domestic market enlargement
 Implementation of more aggressive commercial strategies
 Exit by listing or trade sale
 External growth
 Acquisition of a target company
 Entering into a fragmented sector
 Acquisition of non exploited products
Cluster of Expansion Growth Deals

 Second stage financing : accelerated growth

 Third stage financing : consolidation of the development reached by the

venture backed company.
Internal growth

 Private equity investors compete with banks and other financial institution.

 The investor needs to provide money to the venture backed company in order
to buy or sustain the procurement of working capital and to purchase new
assets.
External Growth

 Occurs through Merger and Acquisition deal.

 Acquisitions are composed of all the services that support the closing of
operations that produce structural and definitive modification on the corporate
aspects of the involved company.

 M&A operations include a set of heterogeneous deals

 The acquisition of a business unit of a company
 The acquisition of quotes that represent a minor participation of the capital risk
of a company
 All deals that allow the transfer of the proprietary control
M&A motivations

 To realise synergy.
 Reducing the cost of debt because of the company’s improved rating.
 Strategic Motivation: company’s competitive position.
 Economic Motivation : cost reduction.
 Financial Motivation: realization of a future investment
 Fiscal Motivation : creates values with newly available fiscal opportunities
 Speculative Motivation: trend in M&A relates to economic and market cycles.
M&A Characteristics

 M&A can be realized in different ways:

 Merger
 Equity carve out
 Breaking down
 Joint venture
 It involves an acquiring investor who does not have any share of the target
company, an acquiring investor with participation in the risk capital of the
target company, and an acquiring investor who owns the total property of the
target.
M&A in the private equity business
Reasons
 Reinforcing the competitive advantages of the company to strengthen its
distinctive skills in the existing activities and businesses
 Expanding competitive advantage to improve and extend the company’s skills
 Exploring the competitive advantages of the company when entering a new
sector that requires new skills
 Short term objectives that can be included among the strategic motivations
refer to:
 Researching and exploiting the scale and scope economies
 Managing interdependence with stakeholders by accelerating growth
 Improving the proposed system and markets served by acquiring a higher market
share and entry into new markets
 Entering into new businesses to obtain critical resources
 Exploiting and optimizing financial resources through the leverage capacity of the
acquired company.
 As for the private equity deal, it can occur in two ways
 Through a direct investment
 Through the setting of a special purpose vehicle.
Advantages for Venture Backed
Companies
Disadvantages of Venture Backed
Companies
Replacement Financing
Replacement Financing

 At mature stage of the company’s life cycle:

 The venture backed company has grown considerably by enlarging the
markets reached and the range of products or services offered.

 Issues
 Organizational structure
 Management activity
Phases of Deal

 In this phase, the level of risk varies according to deal.

 The deal characterizing this phase is named:
 PIPE (Private Investment in Public Equity)
 Corporate governance deals
 LBO (Leveraged Buy Out)
PIPE Deals

 Investment in a company listed in the stock exchange.

 Aims : reach capital gains and return using the usual private equity market
 Purpose: buy minority stake and to sell it at higher valuation

 Deals can be hostile

 They can occur without the consent of the original ownership.
Corporate Governance Deals/
Turnaround Deals
 Features:
 Managing for distressed company.
 Management skill and exceptional leadership profiles.
 Reasons behind turaround
 Strategic changes
 Reengineering
 Re-organisation
 Innovation processes
Valuation and Risk Management in
Turnaround
 Social Risk
 Economic Risk
 Legal Risk
 Management Risk
Different types of turnaround strategies

 Management change
 Revival due to economic cycle
 Launching a new product due to technological innovation
 Competitive background change
 State and government
LBO: Leveraged BuyOut

 A buyout is a structured financial operation that through merger, division or acquisition

of control participation, allows the transfer of the property from the old shareholders to
a new entrepreneur with economic and technical support of a financial intermediary.

 Major part of capital : debt securities subscribed by a pool of banks and financial
intermediaries.
 LBO has special structure.
 A holding company that founds new company responsible for collection of funds
necessary for the acquisition of the assets.
 After acquisition, the new company is merged with the target company.
 As collateral, for the debt repayment, they offer assets owned by the target company
and its ability to create cash flow.
Other type of buyouts

 Management Buy Out

 Management BuyIn
 Buy in Management Buy Out (BIMBO)
 Buy In Growth Opportunity (BINGO)
 Worker Buy Out (WBO)
 Family Buy Out (FBO)
 Investor Buy Out (IBO)
 Public to Private (PTP)
 Reverse Buy Out (RBO)
Deal Sourcing
Generating Deal Flow

 Deal sourcing is the first step in PE firm’s investment process

 Stage when potential investment opportunities are identified and screened.

 For established firms, deal sourcing is a continuous process, as follow on

funds provide a constant source of fresh capital.
 A time consuming and inefficient process, requiring a thorough review of
deals at varying stages of progress.
 PE fimrs have ‘internal business development teams’.
Main ways to source deals

 Proprietary deal flow

 Intermediated deal flow
Proprietary Deal Flow

 Sourced directly by a PE firm without the assistance of financial advisors.

 Primary sources are : personal and business relationships of a PE firm’s
investment
 Drawbacks:
 Not in urgent need of capital, it can take a significant amount of time.
 Business owners can easily walk away from a transaction.
Intermediated Deal Flow

 Paid intermediaries- integrated investment banks, M& A boutiques and

corporate advisory arms of accounting firms
 Play a key role in deal sourcing for larger growth equity and buyout funds

 Predominantly introduced by advisors engaged by the target company and

advisors engaged directly by the PE firm

 Sell side investment bank >> auction process, where a number of investors
will be shown the opportunity and investments in large companies.
Hunting for deals in emerging markets

 Intermediation in emerging markets is immature and inefficient.

 Opportunity for alpha (measure of value generation)

 Financial statements (unauditied, for tax purposes, unconsolidated,
overlapping activities)
 No credible validation of the bonafides of opportunity.
Target valuation
The Valuation Toolkit

 Core of valuation > Business plan

 It translates a target’s forward-looking risks and opportunities into a
multiyear financial forecast.

PE investors develop a base case scenario as well as possible downside and

upside cases.
PE investors apply valuation multiples from comparable businesses to operating
metrics from the business plan to arrive at a company’s enterprise valuation.
 Strategic investors employ different valuation models as they emphasize the
long term value of acquisitions as well as potential synergies with their
existing business.
Venture capital:
The valuation of early stage companies
 Business plans at start-ups project ‘how management will deploy capital
raised over multiple rounds of investment to develop the company into a full
fledged, profitable business.’
 Valuation is based on assumptions related to
 Development of a unique and sustainable business model
 Successful execution of a growth business plan
 Fund’s target internal rate of return = 40 to 80% depending on the maturity of
the company
 Starting point for VC investment discussions is the amount of capital a start
up company will need to reach its next stage of development
Example: valuing early stage companies

 A VC firm is looking at an investment of $2 million in an early stage

opportunity today.
 Exit in 5 years at a revenue multiple of 8x and year 5 revenue of $15 million
 No debt required; no additional equity to be raised.
 Required IRR is 70%.
 What % of the company should the VC ask for?
 Start ups usually require several rounds of fundraising.

 The ownership split between the founders and external investors must be
considered throughout the start ups fundraising process to ensure that the
founding team is engaged and motivated by a meaningful stage in the
business.
Growth equity and Buyouts
The valuation of Mature companies
 Target mature, profitable companies with established operations and a track
record of performance.

 Use historical data + intrinsic value of going concern + assets value.

 Business plans for multiple operating scenarios are developed

 Base case financial scenario
 Upside case : outperformance
 Downside case: underperformance
 In context of an LBO, the ability to finance a portion of the target’s EV with
debt is a key driver of investment returns.
 Estimate the level of debt financing that banks are likely to extend to the
transaction. It is based on industry debt multiples
 Amount of interest-bearing debt per unit of operating cash flow.

 Buyout investors consider a range of capital structures, debt instruments and

debt servicing requirements when determining the optimal capital structure
for a buyout.
Deal Pricing
Understanding Enterprise Value
 EV ~ value as a buyer might place on 100% of the shares of a business having
no borrowings and zero cash at bank
 Debt free, cash free.
 Unquoted companies will commonly be expressed in terms of EV, as opposed
to price per share or market capitalization
 When a PE investment involves a change of ownership, as in LBOs, the change
of control will usually trigger mandatory repayment of existing senior debt.

 Used to value find pricing internally.
 To estimate likely possible investment returns.

 EV calculations are used by PE fund to establish minimum price expectations.

 Seek to maximise price further through establishing a competitive auction and
by exploring other exit routes.
Points to consider in valuation multiples

 Valuation multiple : expression of the market value of a company relative to a

key statistic driving that value.

 Employ ‘comparables’.
 Parameters for comparables : similar business and product lines, asset size,
number of employees, revenue growth, margins, return on invested capital
and cash flow.
Commonly used Comparables

 EV/EBITDA

 EV/OpFCF

 EV/Sales

 EV/Book Value
Deal Pricing Dynamics
1. Bidding for a deal
2. Buyout pricing adjustments and closing mechanisms
3. Post closing price adjustment
 Initial valuation is based on an incomplete set of information and assumptions
around business plan drivers such as revenue growth, margins, and the
likelihood of various operating scenarios to play out, as well as a number of
assumptions around imperfect pricing inputs such as multiples or discount
rates.
Bidding for a Deal
Setting the Price and Winning the Deal
 PE firms often pursue targets in a competitive sales process.
 It is in a PE firm’s interest to bid as low as possible both to account for the
assumptions and execution risk of a target’s business plan and to boost
returns.
 Bids for target companies are often made with varying degrees of access to
the target’s financials, strategy and management (imperfect information)
Two key reference points for valuation

 In buyout investment context

 Last 12 months (LTM) EBITDA
 Next 12 months (NTM) EBITDA
Key input factor for bid price

 Planned amount and structure of debt in the transaction.

 Determine the exact debt package in cooperation with their lead financing
banks.
Two stage Auction

 In deals concerning large and mega buyouts, multiple parties compete for the
right to acquire a target company. This competition is organized by an
investment bank (the sell side advisor) to maximise the price and certainly
realized by the seller.

 Bidders enter into a structure auction process designed to produce a winner

from a progressively narrowing field of interested bidders.
Bidding strategies in an auction

 A subjective process
 Based on information set that is managed closely by the target company.
 Parties invited to the auction typically “bid on the book”
 Lack of information on other competing bidders.
 All bidding parties rely to varying degrees on rumors and information about
the process in the market.
 Bidders are wary of ‘winner’s curse’.
 The price implied by a fund’s minimum target return theoretically represents
the bidder’s maximum bid.
Deal Pricing Dynamics outside the
Financial Model
 What factors could encourage you to improve your bid or what implicit risks
are there in the existing valuation which would strengthen your resolve that
you have already put your best foot forward?

 Don’t assume EBITDA is a proxy to cash flows

 Management capability
 Uniqueness of the Final Existing Asset
 Foreign Exchange Risk
 Fund portfolio construction
Buyout Pricing Adjustments and Closing
Mechanisms
 An in-principle agreed upon price : the buyer and seller negotiate the final
purchase price.
 The exact amount and composition of transaction proceeds are subject to a
series of pricing adjustments

 Tow important entries

 Net Debt
 Target Working Capital
Closing Mechanisms

 LOCKED BOX MECHANISM:

 Fixed price mechanism that sets the value of net debt and
working capital at a specific date before signing of the SPA.
 Economic risk of the target is transferred to the buyer as of the
locked box date.
 The exact proceeds flowing to the existing shareholders are
known as of deal closing.
 COMPLETION ACCOUNTS MECHANISM
The Managerial Process
The need for structured managerial
process for PE business
 Information asymmetry
 Variation in incentives
 High degree of uncertainty
 Principal agent relationship

 To free from the need of depending on characteristics of investors, deals and

the level of involvement.
Venture capital cycle

Fundraising

Investment
Exit and
Monitoring
Equity investment as a process:
Organization and Management
 Vehicles for investment activity
 Partnership
 Limited Partnership
 Corporation
 Closed end fund
 Difference between VC and financial intermediaries
 Limited life
 Flexibility
 Remuneration mechanisms
The Four Pillars of Equity Investment
Fundraising


 To find money and create a commitment.

 Based on higher returns.
 Premium is for the extra risk taken

 The success of the private equity investor is measured through IRR.

 The main benefit of this strategy is improved credibility
 COST: suspicion on the quality of investment strategy
 SOLUTION : hire anchor investor.
 Anchor Investor: called ‘Special Limited Partner’ because he subscribes a relevant
amount of capital and usually provides the financial resources (Seed Funding).
Investing

For competitive advantage>> deploy debt >>

because private equity investment team is involved in the governance of
the venture backed companies financed.

It is important to have a clear entry and exit strategy, as well as rules

established between investors and the entrepreneur regarding transparency,
involvement in board of directors, and the general overview of the company
management.
Managing and Monitoring

 It increases the probability to create value and ease the activity to control
opportunistic behaviors of VC backed companies.

 Supports the company by participating in all activities concerning the BOD.

Exiting

 Exit decisions.
 Influenced by external or internal factors related to the status of the
company and its industry as well as financial market.

 Common exit strategies

 Trade sale
 Buy back strategy
 Sale to other private equity investors
 Write off
 IPO
Fundraising
Elements of fundraising

 Players involved
 Problems and risks
 Objectives
 Players Involved:
 Individuals
 Institutional

 Problems (due to interaction between groups involved in fundraising)

 Information asymmetry
 Moral harzard
Creation of Business Idea
 Preparation of Information Memorandum
 Preparatory phase.

 Elements of information Memoradum

 Choice of vehicle
 Target to invest
 Size of the vehicle and minimum for closing
 Corporate governance rules
 Size and policy of investments
 Code of activity
 Track record of promoters
 Usage and size of leverage
 costs
Venture capital organisations

 Business Angels
 Private pool of funds
 Corporate funds
 Mutual investment funds
 Public private equity firms
 Financial intermediaries
 Public funds
Job Selling

Identification of target market

Premarketing
First draft placing memorandum
Structuring of the fund
Distribution of informative material
Meeting with investors
First verbal adhesion
Sending of legal documents
Closing
Types of investment

 Seed Financing : Experimentation phase

 Technical validity of the product has to be demonstrated.
 Limited financial contributions to the development of the business idea
 Start-up Financing: Beginning of activity phase
 Investor finances the production activity
 Level of financial contributions and risk is high
 Early stage Financing: First development phase
 Beginning of production activity has been completed
 Commercial validity of the product must be fully evaluated.
 High financial contributions and lower risks.
Investing
 Investment phase can also be analysed according to
 Groups involved
 Problems and risks
 objectives
The Investing Phase

 Investing is core of private equity business and the way to develop a business
idea for the investor.
 Two relevant phases
 Decision Making
 Deal Making
 Variables that influence the choice of investment
 Sector of the new initiative
 Strategy followed
 Level of preparation of the potential entrepreneur
Decision Making
Origination • Generate opportunities from its network

Screening • Preliminary analysis of opportunities

Valuation and • Meeting with entrepreneur, use financial and

Due Diligence strategic techniques, due diligence activities

Rating • Transforming activities into a rating

Assignment

• ‘to sell’ the valuation to the entrepreneur in

Negotiation
competition

Decision to invest • Negotiation leads to a final price

Deal Making
 Signing the contract deals with the terms of the agreement regarding
 Pricing
 Quota of participation
 Administrative aspects (between company, shareholders and investor)

 Once the final agreement is achieved, then operation is formalized

with the
 Transfer of the shares
 Payment of the price
 Issue of the guarantees
 Reorganisation of the board of directors and management team
 The deal making or the contractual package defines the commitment of the
equity investor with respect to the venture backed company.
 It impacts and sustains value creation
 And allocates duties and rights between the equity fund and the venture
backed company.
Managing and Monitoring
Need for a management and monitoring
phase
 To achieve the common objective i.e. creation of value
 To share the profits among the entrepreneurs and venture capitalists

 Need to
 Define and share various details and agree upon both medium long term
and daily rules.
 Must commit to working together and under total transparency and
information sharing
 Critical issues that provoke debates and problems include
 Duration of investor involvement
 Strategies used to increase company value
 Financial and industrial alliances
 New opportunities that modify the pre-investment situation
Performance Determination

 How to evaluate the investment made by funds

 Through Performance Determinations
 Which are derived through the guidelines given by industry associations

 Problem exists for those firms for which no efficient market exists previously.
 Problem is on determining the investment performance.
 Different types of IRR followed

 Gross return on Realised investments

 Gross return on all investments
 Net return to the investor
Managing and monitoring phase

 Actions to create and measure value

 Actions to protect value
Actions to create and measure value

 Board sevices
 Performance evaluation and review
 Recruit management
 Assistance with the external relationship
 Arrange additional financing
 Mentoring
Actions to protect value
 Covenant
 Positive
 Negative
Exiting
 Final step in the investment process
 Venture capitalist sells the stake to gain the value added created by the
investment and the managing and monitoring activities of the venture.
 Frame exit strategy
 Exit strategy considers the sector, the investment length, the external
economic environment and the stage of development, etc.
 Characteristics of individual agreements, and found that the governance, the
dividend policy, and the existing financial leverage.
The Exit Vademecum

 Detailed exit strategy plan

 The specific rules and covenants of the investment
 Timing opportunity driven by the company’s business
 Timing opportunity driven by the financial and merger and acquisition
markets
 Capital requirement
 Exiting track record of the portfolio
Exit alternatives

 Trade Sale
 Buyback
 Sale to other private equity investors
 Write off
 IPO or sale post IPO
Listing a Private Company
 IPO is a tool that allows the rebalancing of the passive side of the balance
sheet because it infuses new financial resources into a company.

 Key to support the firm’s growth

 Helps in realizing new development opportunities

Different types of companies interested
in listing process
 Development companies: from family company to professional one
 Replacement financing companies : changes in the composition of the
property related to a family succession
 Growing companies : reached critical dimensional threshold and intend to
continue growing by using a merger and acquisition strategy
 Financially stressed companies : companies that need to rebalance their
financial position by addressing the new funds to cover their previous
investment plan.
Company valuation in Private and
Venture Capital
New trends and solutions in Private
Equity and Venture Capital Industry
Incubators, Accelerators

 Both boost the growth of start up companies.

 Accelerators usually provide an injection of money to the start up company

and they are structured in a way such that the start up founding team can
work with mentors of accelerator.

 An accelerator is the access to the network of professionals that can help the
company cope survive in the first years of activity.
 Incubator is an entity that interacts with entrepreneurs and with start up
companies and that offers to them sevices and mentorship with the main goal
to kick off the start-ups operations.

 Incubators are usually owned and managed by either governments, public

administration entities, or universities.

 It plays the role of laboratory in which managers, inventors and entrepreneurs

can work usually sharing the space with other start ups for time frame of 2-3
years.
 Incubators provide
 Assistance in the business plan
 Access to infrastructures
 Consultancy and mentoring one different topics
 Aid in the research and hiring of human capital
 Access to capital, both in a direct or indirect way.
Crowdfunding

 A recent financial source

 They are investments made in unlisted companies or projects by individuals
who are neither institutional investors or venture capitalists.

 Crowdfunding platforms
 Donation based platform
 Reward based platform
 Equity based platform
 Lending based platform
Impact investing

 Developing field.
 Investments in companies, organisations and funds with the intention of
generating measurable social and environmental impacts alongside a financial
return.
 Impact investments can be made in both emerging and developed markets,
and target a range of returns from below market to market rate, depending
on the circumstances.