6 Flashcards

What is the private equity market
Private placements
Private equity firm, venture equity and non venture equity
Suppliers of venture capital
What is private equity
All kinds of funds that pool money from a number of investors in order to gather large amounts of money that are then used to acquire stakes in companies
What is private equity non venture part often associated with
Funds looking to mature, revenue generating companies in need of some revitalisation
Where does private equity primarily come from
Institutional investors and accredited investors who can dedicate substantial amounts of money for extended time periods
What is venture capital
Technically private equity but venture capital often goes into younger companies generally with high-level risk that look promising but need an injection of cash in order to grow. They can be very hands off or may want a say in how company is run
How do venture capitalists make their money
By finding good deals in young businesses and offer to invest a set amount of money for a share in company. They’ll rarely buy company outright 
What are the financing stages
Seed money
Start-up
Later stage capital
Growth capital
Buyout financing
What is a general cash offer
Issue of securities offered for sale to general public on cash basis
What is a rights issue
Public issue of securities in which securities are first offered to existing shareholders
What is initial public offering (IPO)
Companies first Equity issue made to public
What is a seasoned equity issue (SEO)
New equity issue of securities by a company that has previously issued securities to public
What is investment banking function in cash offer
Formulate method used to issue new securities
Price new securities
Sell new securities
What are the methods of underwriting in cash offer
Firm commitment
Best efforts
Dutch auction
What is firm commitment
Underwriter buys entire issue for less than offering price and accepts risk of not being able to sell them. Difference between underwriters buying price and offering price is called spread or discount
What is best efforts
Underwriter acts as an agent receiving commission for each share sold. Underwriter sells as much of issue as possible but can return unsold shares to issuer without financial responsibility
What is Dutch auction
Underwriter doesn’t set fixed price for shares to be sold. Instead, underwriter conducts auction in which investors bet for shares. Offer price is determined based on submitted bids
What is the aftermarket
Period after a new issue is initially sold
What is the green shoe provision
Contract provision giving underwriter option to purchase additional shares from issuer at offering price. Also called over allotment option
What is the lock up agreement
Part of underwriting contract that specifies how long insiders must wait after an IPO before they can sell equity
What is the quiet period
Period following an IPO during which many regulatory authorities place restrictions on public communications of issuer
What happens if the offer price is either too high or too low 
Too high – issue wouldn’t be successful
Too low – firm wouldn’t receive much as it could
Must be some level of underpricing to encourage investors to buy
Why does underpricing exist
Determining correct offering price is extremely difficult
Helps ensure success of security offering
Rewards IPO investors for purchasing risky securities
Addresses issue of winners curse and rewards institutional investors for information they provide to underwriters regarding potential interest in and value of a security issue
Why do prices drop on announcement
Managerial information – why are managers not issuing debt. Do they know something that investors don’t
Debt capacity – has firm exhausted its debt capacity
Falling earnings – if equity is not linked to an investments, is it to fund future earnings shortfalls
What are the direct and indirect costs of new issues
Spread or underwriting discount
Filing and legal fees, taxes
Indirect expenses
Underpricing
Green shoe option
