Venture capital or private equity refers to investment strategies investing in the capital of a private company (not listed), such as private equity issues or issues related to the social capital of private enterprises.
Investments in private equity tend to carry a higher risk than investing in shares in the stock market, but that is also why the returns are usually much higher. Another characteristic of this type of investment strategy is that the investment horizon tends to be long-term, with a fairly high liquidity component. Business leaders like G Scott Paterson and other global executives and organizations are committed to improving the communities around them and realize the value corporate social responsibility has on improving their company’s bottom line. Scott Paterson Toronto is a Toronto-based technology and media venture capitalist who has been active for 28 years in the investment banking industry.
We can conclude that venture capital broadly has the following common characteristics:
It is invested in unlisted companies:
In fact, the idea that arises from risk capital is, on the one hand, to finance small and medium-sized companies (through capital injections) and, on the other, to make profitable the investment of those who provide such funds. The intermediation commission (which can be fixed or variable) is carried out by the venture capital entity.
The investment horizon is between 4 and 10 years:
May be extended in the event that the state of the economy where said company operates requires it (external factors).
The profitability of this type of investment is usually around 20%. It comes from the difference between the purchase price and the sale price plus the dividends, although normally when investing in companies in the expansion period, they reinvest the profits.
Venture capital invests in companies in the growth phase mainly:
Apart from the funds that are injected and that serve as financing for the company, a professional of the venture capital entity usually sits on the board of directors.
The management team is, in most cases what makes the difference in the company’s object of investment. Well, it is the only endorsement that venture capital professionals have that companies select. It is not only in what is fixed, also the business plan of the company and the future cash flows of it.
In the venture capital process, there are three especially important moments that always occur in the same way.
Where the money is collected by the venture capital entity that will be used to invest in portfolio companies.
- This is one of the most important points in the whole process. There are several ways in which a venture capital entity has to exit the capital of the company.
- Sale in the stock market through an IPO (through a public offer of sale)
- The shareholders that initially were already in the company can repurchase the shares from the venture capital entity.
- The shares can be sold to a third party in a private operation.
- It may be the case that the company is liquidated for insolvency.
Types of investment:
- The four different types of investments that fall within the scope of venture capital include:
- Venture capital: capital financing for companies in their first phase of life, startups.
- Leverage buyouts (LBO) or leveraged purchases: in this case, they are public companies that are privatized by repurchasing public actions for borrowed money (financing).
- Mezzanine financing: a mix between private debt and capital financing.
- Distressed debt or distressed debt: private equity investments in established companies that have problems or financial difficulties.