PE – 2 aspects

Source of financing
Investment from the institution point of view

Throughout the course, the definition of PE will be used in its broad meaning, which
also includes VC

VC is a very specific case of PE. The investments in the very early stage of a company’s
life.

How does the relationship between the PE and Venture backed company work?

The investor gets shares of the equity of the company in returns for the inflow of cash.

Venture backed company

ASSETS DEBT
Private
Equity
Shares Investor
EQUITY

Cash

Consequences of financing

 A company needs money for a certain and clearly identified reason

 A company collects moneys with the issuance of equity on the private market, the
company does not pay any interest expenses to the PE
 The newly issued shares will be bought by the PEI
 The professionals will not only become an shareholder but will contribute to the
management of the company. The smaller the company is the larger the contribution
of the PEI in the business management will be.
 The Investor will create profit only through generation of capita gain i.e. existing
from the investment by selling shares to someone else on the market

The most crucial aspects in PE is the strict relationship between the investor and the
entrepreneur.

Pricing Liquidity Monitoring

The price is driven by the Liquidity is very high. When trading on a stock
market either upward or Whenever an investor there is always a very high
downward wants to sell the shares of level of protection for the
 the public company there
is always a buyer
The price is the result of Selling is not that easy,
negotiation process which Since there is no stock
be both easy or hard exchange
shareholders, regardless of
their stake in the company
They have to protect the
shareholders

The venture backed company has direct and indirect benefits

Direct- Funding
Indirect- certificate, network, knowledge and financial benefits

The certificate benefits- confirms the very high quality of the company’s accounts
The network- PEI can give Company a very strong network, in terms of supplies,
consumers, and bank therefore multiplying its possible contact
Knowledge- Soft and hard- Soft- capability to manage the business
Hard- field knowledge
Financial- injection of cash in returns of shares, effects on the cost of capital.

Equity ^ Rating ^ Positive effect on the cost of capital( reduces)

Development  Startup Early growth  Expansion (Expansion Financing) 

Mature Age ( Replacement)  Crisis (vulture financing)

PEI- Minority ( later stage) / Majority (start up phase)

Hands – on
Hands off