Finance CH6
What is the expect return later?
( 15-20% area)
What does venture capital financing consist of?
-Seed/Start up funding -First round funding -Intermediate / second round funding -Later stage funding -Equity loan -Mezzanine funding
What are the primary functions of an investment bank in an equity offering?
1. Advising the issuer on the terms and the timing of the offering 2. Buying the securities from the issuer 3. Distributing the issue to the public
What are the stages of the financing life cycle of a typical company?
1. Owner's Capital 2. Bank Financing 3. Venture Capital / Private Equity 4. Security Offerings 5. Mergers & Acquisitions
What are all of the primary roles/objectives of the SEC as a regulator?
1. Protect Investors 2. Information Disclosure 3. Operational and pricing efficiency of security markets 4. Fair and Orderly Markets
What is the average first day return on an initial public offering and what is this evidence of?
15% and this is Evidence of Underpricing
What are the advantages of initial public offerings?
An IPO creates advantages such as liquidity to investors, it provides capital to organizations and opens the possibility of an employee ownership plan.
What are the disadvantaged of initial public offerings?
An IPO creates disadvantages, namely IPOs are expensive, organizations are forced to provide complete disclosure of operations, and principal investors lose control
Mezzanine funding
Company's progress makes positioning for an Initial Public Offering viable. Venture funds are used to support the IPO.
Seed/ Start up funding
Earliest stage of business, typically no operating history. Investment is based on a business plan, the management group backgrounds along with the market and financial projections.
How do IPO's compare in the short term and long term?
IPO's appear to be good short term investments, but subpar long-term investments.
Initial Public Offering (IPO)
Initial sale of common stock to investors in market (regards stock that has never been traded in the market place before this offering)
What is the Long-Term (3 year) adjusted performance of IPO's?
It is negative!
What do secondary securities market provide?
Liquidity for primary market and price determination.
Later stage funding
Mature company where funds are needed to support major expansion or new product development. Company is profitable or break even.
Intermediate / second round funding
Maturing company where a future leveraged buyout, merger or acquisition and/or initial public offering is a viable option.
Equity loan
Offer of an ownership position to induce the loan or can be a note that has an option to convert from debt to equity.
Secondary Offerings
Sales of common stock by publicly-held firms
Seasoned Offerings
Subsequent sales of common stock to investors. Also known as secondary offerings.
What is the winner's curse?
The Average Investor Does Not Get the First Day Return. AKA most investment banks that are bringing an IPO public will sell those shares to their best clients and for that reason, the average person is not going to participate in an IPO and are not able to acquire IPO's
What is the difference between secondary securities markets and primary securities markets?
The difference between secondary securities markets and primary securities markets is that, in the secondary market, the seller receives all the funds from sale of the security, and the issuer of the security receives nothing.
Book definition of secondary securities market
The gain or loss of an investment over a specified period, expressed as a percentage increase over the initial investment cost. Gains on investments are considered to be any income received from security, plus realize capital gains.
What is the expected return the earlier you enter into financing?
The greater risk and therefore the higher expected rate of return. (30-40% area)
What is the primary objective of the SEC?
The primary objective of the SEC is to provide investors with complete information disclosure of all material information concerning publicly traded securities.
What is the primary securities market?
The primary securities market is the source of capital for issuers. The issuer receives the proceeds from the sale of those securities.
What is the secondary market?
The secondary market is where previously issued financial assets are trades between investors. Issuers do not receive the proceeds.
First round funding
Typically funding that accommodates growth. Company may have finished R&D. Funding is often in the form of convertible bond.