SUMMER INTERNSHIP PROJECT ON

PRIVATE EQUITY & VENTURE CAPITAL.

Undertaken at

COURSERA

Submitted in partial fulfilment of the requirement for the

award of the degree of

MASTER OF BUSINESS
ADMINISTRATION
BATCH (2020-2022)
Submitted by Name of the
Industry Mentor
Name of Student AKSHAT DWIVEDI

MBA Semester II
Enrolment No. 200617200235

Under the Guidance of

SAMIR THAKKAR

Designation

PARUL UNIVERSITY

FACULTY OFMANAGEMENT STUDIES

P.O. Limda, Tal. Waghodia, District Vadodara-391760

 Declaration

I AKSHAT, Enrolment No.200617200235 from

( Name of your Institute e . g . PIMR (MBA) ),
Semester III of the Parul University, Vadodara
hereby declare that the Summer Internship
Report__________ entitled is an original work
and the same has not been submitted to any
other Institute for the award of any other
degree.
 INSTITUTE CERTIFICATE
It is hereby certified that the Summer Internship Report submitted in partial
fulfillment of M a s t e r o f B u s i n e s s A d m i n i s t r a t i o n at
( Nameo f your Institute e . g . PIMR/ PIET(MBA) ), Vadodara by < Name
of the student > Enrolment No.
<> has been completed under my guidance and is Satisfactory.

Date: <DD/ MMM/ YYYY>

 INTRODUCTION

There are four very good reasons that we understood in this course
are as follows:

1. The first reason is related to the fact that private equity of

venture capital is a very relevant and important topic private
equity of venture capital means to deal with the future.

2. The second reason is related to the content. Content are very

rigorous, solid, complete, but also exciting.

3. The third reason is related to the philosophy of the course. The

philosophy is absolutely interesting and challenging because
it's a melting pot.

4. The last aspect is related to the pay off.

Objective of this course
1. private equity of venture capital means to deal with the future.
2. Content are very rigorous, solid, complete, but also exciting.
3. Acquire a strong knowledge
4. Challenge your learning experience.
5. Payoff. (discover insider’s secrets)

In this course we will learn about following:

● Taxonomy of private equity & venture capital.

● Legal issue & taxation.
● Managerial process.
● Company valuation 7 deal making.

What Is Private Equity and Venture

Capital?
Private equity
The definition of private equity is based on two different aspects
we must have in mind every time we deal with this issue.
● On one end private equity is a source of financing for a
company.
That means a private equity is an alternative of other sources of
financing
like an IPO or bond issuing or getting a loan from the banking system.
● On the other hand, private equity is an investment made by
a financial institution, we name private equity investor,
in a company which is not listed in the stock exchange.
The last aspect we must have in mind when we talk about the
definition of private equity is sometimes we also use the label
venture capital.

Venture capital

Venture capital is a very specific case of private equity.

That means we have venture capital when the private equity investor
invests
in a company staying in a very early phase of development, or in a
start up.

⮚ Now lets understand the relationship between the private equity

investor and the company which is financed by the private equity
investor itself.
That's quite important also, to fix the taxonomy of this kind of deal.
because company wants to use private equity investment, is going to
issue new shares.
These shares are bought by the private equity investor, and for
this reason the private equity investor is going to give money to the
company.
The company receives money and the need of financing is satisfied.
But the consequences of this very simple deal which is based on the
company and on the private equity investor are very important.

⮚ The first consequence, the private equity investor is not simply a

financier
like a bank giving loans, but the private equity investor is also a
shareholder.
 That means the private equity investor can enter in the
governance of the company, can support the management of
the company itself.

⮚ second consequence is that the only way to receive a

remuneration for the private equity investor is related to capital
gain. Because the only way the private investor can use it to
obtain profit is to sell the shares and to put in its pocket, a capital
gain.the fundamental mechanism of a private equity investment.
Before we said private equity is not public equity, so it's finer to
compare private equity with public equity to better understand
the mechanisms and I want to use three different parameters to
compare private equity to public equity.
⮚ The first parameter is related to liquidity
⮚ the second one is related to pricing, and
⮚ The third one is related to monitoring

Why Companies Need Private Equity

and Venture Capital
a company accepts a private equity on board for four very relevant
benefits.
The four benefits are:
1. The certification benefit,
2. The networking benefit,
3. The knowledge benefit, and
4. The financial benefit.
● Let's start with the certification benefit. If you accept to have a
private equity investor on board, you are, in a certain sense,
certified, because the decision that the private equity took to
invest in a company means that the company is a company of very
high quality. For this reason the company can use this stamp to
 promote its qualities, profiles, and reputation all around the
market.
● The second benefit is the so-called networking benefit. Every time
the private equity investor invests in a company, the private
equity gives a strong support to the company giving an access to
his or her network; which means to multiplying opportunities and
interacting with new suppliers and with new customers. That's
absolutely important for a company willing for example to grow
the amount of sale.
● The third benefit is the so called knowledge benefit. As the private
equity investor becomes a shareholder of the company, the
private equity is able to transfer his or her knowledge to the
company. Knowledge could be soft knowledge: Soft knowledge
means capabilities to manage a team, capabilities to lead a
company, capabilities to negotiate with other players; but
knowledge could be something harder. For example, industrial
knowledge, expertise in chemicals, and in R&D. So knowledge is
quite relevant, especially for companies that are in the very first
phase of development, that means in venture capital deals.
● The last benefit is the so-called financial benefit. Just simply for
the reason a private equity invests in a company, the company
receives an incredible support. And support is made by the
increase of the amount of equity and is made by increase of the
credit standing of the company. That means the rating of the
company is going to increase, and as the rating of the company is
going to increase, the capability of the company to reduce the
cost of capital becomes absolutely affected.

Private Equity Through Fund Life Cycle

when Company is in first stage then knowledge of PEI - is very important

Main reason when Company needs PEI For Money

Company Life Cycle
1. First Phase: Development R&D activity.
2. second Phase. Start-up • Fixed Asset & working Capital.
3. third Phase: Early growth, support to Sales growth.
4. fourth Phase: Expansion. New Fixed Asset &working Capital.
 5. Fifth Phase: Maturity Acquisition & business transformation.
6. Sixth Phase decline Exit the crises

Who will invest in different phases in the

company life cycle
● Development Phase

- family &friends
- Founders
- Business Angel
- venture Capital.
● Start up phase

- Family and friends

- Venture capital
- Business angle

3.Early growth phase

- venture Capital
- Bank

4. Expansion phase
- bank
-trade credit
- private equity

5. Maturity phase
- stock exchange
- IPO
- private equity
- bank

6.Decline phase
- family & friends
- founders
- private equity

Different stages of financing

- A Private equity Investing in a Company in the phase of
development is named seed financing
 - A Private equity Investing in a Company in the phase of start up
is name as start up financing
- A Private equity Investing in a Company in the phase of early
growth is- called early growth financing
- Seed financing +start-up financing +early growth financing
altogether is known as venture capital

In each Stage there is a different Market & a different risk return

Profile PEI can be either a Minority or -Majority shareholder.
Seed financing has a rule of 100/10/1.
SCREEN 100 PROJECT
FINANCE 10 PROJECT
SUCCESS 1 project
the growth of the company can be managed two different
ways growth could be internal or (organic), & external.

Internal growth – the role of private equity is to give money to the

venture backed company to buy working capital and new assets its
simple task and wide offer.

External growth – buy another company to increase the level of sales.

The role of PE to give money but also be an advisor and consultant of
the company.

Step of an M&A process – the role of PE

● To screen & scout the market.
● Support negotiation with potential target.
● Provide money to venture backed company
● Give legal &taxation support.

⮚ REPLACEMENT FINANCING- TO FINANCE A MATURE

COMPANY.

The role of PE to replace an existing shareholder.

⮚ Vulture financing
⮚ To finance of a company in crisis or decline.

There are two different deals

 ● Restructuring financing.
● Distress financing.

1. Restructuring financing
Restructuring financing is also known as turnaround financing.
The idea is that a company stays in its crisis but the company is
still alive.

2. Distress financing
Distress financing means is a financing of a company which is
dead.
The role of PE is to buy the asset of the defaulted company.

Now let us move to different formats of private equity

investment.

There are two different formats regulate private equity

investment.
● The European union format.
● The anglo saxon format.

● The European union format used in brazil, turkey, Russia.

● Whereas anglo saxon format used in India, Australia, &

common wealth countries.

THE EUROPEAN UNION FORMAT.

The private equity is a financial service.

The financial system’s has two directive
● Banking directive.
● Financial service directive.
There can be only three entities in private equity investment
 1. Banks.
2. Closed end funds.
3. Investment firms.

THE ANGLO SAXON FORMAT.

In UK & US the private equity is not financial service but it is an

entrepreneurial activity like managing whatever kind of company.

● Banks are same in all kind of formats banks works similar in

both the formats.

Closed end fund in Europe

It is most relevant vehicle.

It is very useful to understand
The mechanism of private equity investment
Close end fund involve three players and are represented by the AMC
(ASSET MANAGEMENT COMPANY).
The three player of closed end fund are as follows :
● AMC
● CLOSED END FUND.
● INVESTORS.

1. AMC (ASSET MANAGEMENT COMPANY)

● FINANCIAL INSTITUTION APPROVED & SUPERVISED BY
LOCAL SUPERVISOR WHOSE TASK IS TO MANAGE A FUND.
● Group of people advising investors shareholders of an AMC
could be any kind of players.
● AMC doesn’t invest money but every time an AMC is going
to launch a fund.
● AMC has to invest atleast 2% of the value of the fund.

2. CLOSED- END FUND.

● A fund is a bank account in which investors put money to be
managed all together.
● Higher diversification.
● Higher economies of scale.
● Closed end fund means where investors can only invest in the
beginning of the fund & they can exit only at the end.
● Closed – end funds are designed to manage private equity.

LIFETIME OF A FUND.

● FUNDRAISING
● DRAWN DOWN PERIOD

1. FUND RAISING
● -1.5 to 0 time is known as fundraising.
Average size of a closed- end fund can be range between 100-
300 million euro.
Minimum amount which is also known as ticket.
Ticket: 1 million euro. If company fail to collect this minimum
amount or ticket then the fundraising fails.
If company collects 50% of ticket amount then company can
say that the fundraising is successful.

2. DRAW DOWN PERIOD

● 0-3 YEARS of running a company is known as draw down
period.
In this phase company wants investors commitment,
The commitment must be % they have invested into the
company.
Average year of a company is 10 years it is denoted as N.
Hence, N=10 years
N+3 years is given to company to give back the money of
investors

The closed end fund closes at 13 years of time span.

AMC is going to receive two different type of profit from

closed end fund

The two type of revenues are as follows:

● Management fees.
● Carried interest.
Usually close end fund are of 10 years, but investors can
invest further into the company upto 13 years the 3
years allotted to investors is known as Extra time.

Management fees
● It is a yearly fees
● Management fees is a fixed percentage of money
Calculated on the value of the fund in the
beginning of the fund itself

Carried interest
● carried interest calculated at the end.
● Carried interest = % * (final IRR –
hurdle IRR)
IRR is 25 to 30% is standard.
The hurdle rate is 7-8% standard
If the final IRR is less than 8 then
company will receive interest.

Waterfall mechanism without catch-up

= %*(final irr – hurdle irr)

With catch up
= % * (final IRR)

3. INVESTMENT FIRMS
● Banks
● Investment firms

BANKS
 ● It is uncommon for banks to invest in PE
directly
In PE.
Reason are as follows:
● High regulatory capital cost.
● Tight law constraints.

INVESTMENT FIRMS
Investment firms can directly invest in
private equity.
In investment firm we must have two types
of shareholders
● A- Shareholder
● B-Shareholder
A- Shareholders
● They are the shareholders, who
manages the investment firm.
● Remuneration
A-Shareholder gets management
fees (every year)
Carried interest (every year)

B- Shareholders
● They are not managing the firm
but simply investing like the
investors.
● Remuneration
Gets profit in the form of carried
interest which is given to A-
Shareholders.
ADVANTAGES IN USING INVESTMENT FIRMS
● Leverage is possible.
● Direct management of capital.
● With less regulation.

Anglo-saxon system, related to US/UK.

US Market
5 Private equity investment vehicles:
● Venture capital fund
● SBIC (small business investment companies)
● Banks
● Corporate ventures
● Business Angles
The Most relevant is venture capital funds VCF is the
largest PE market in the world.

Limited Partnership(LP)
● Legal entity with 2 groups of shareholders.

Lps are investors and GPS are managers. After 10

years the vehicle is tax transparent.
After that the taxes are paid by LPS + GPS
GPs remuneration - management fees.
US vs EU = Different Legal entities some crore
business.

SBIC was established in 1958.

● Created to estimate the private equity market.
 ● PPP stands for

The UK has venture capital funds.

Managerial at process day by day management of

investors Money.

4 quality activities are

● Fundraising
● Investing
● Managing & Monitoring
● Exiting
Fundraising has four activity
● Creation Of business idea.
● Scaling Job
● debt raising
● Closing
Investing Involve two activity:
● decision making phase
● deal making phase.