Venture Capital And Private Equity - Chapter 7 PDF

CHAPTER 7 VENTURE CAPITAL AND PRIVATE EQUITY 01. Introduction of Venture Capital and Private Equity PE and VE are investment strategies that focus on the acquisition of company (s) or in other words take an equity position in the ventures improving their business strategy, company’s perfo...

CHAPTER 7 VENTURE CAPITAL AND PRIVATE EQUITY 01. Introduction of Venture Capital and Private Equity PE and VE are investment strategies that focus on the acquisition of company (s) or in other words take an equity position in the ventures improving their business strategy, company’s performance and at the end of the day selling them to gain a profit. It is form of equity based investment with the ultimate objective of gaining as much profit as possible at the point of exit. PE and VC will invest in joint venture company which has a potential to grow and is commercially viable. However, this is not perpetual simply because the PE and VC will exit from the joint venture after a certain number of years when they secure their profit on the investment at which stage it is normally known as ‘harvesting 02.  Overview of Venture Capital Venture Capital (VC) is a subset of PE which typically invest in the early stages of newly setup company that involves with higher risks Private Equity will invest in more mature company so the risk exposure relatively lower than VC. The Islamic PE and VC are investment that are carried out according to specific Shariah parameters which include the nature of business, investment, financing, administration as well as the operation of PE and VC must comply with Shariah. It is in line with the natural concept of Islamic Finance where involves partnership arrangement and risk taking in the business venture as in the case of musharakah and mudharabah contracts. Profit motivation and performance target are no differences between conventional PE and VC. Islamic PE and VC become an important elements for socially responsible or an 03. ethical form of investment Definition Venture Capital (VE) VC is form of investment provided to early stage , high growth potential and high risk growth start up companies. VC companies make profit by owning equity in the target company which is normally involved in new technologies such as biotechnology, green technology, new energy industries, and etc. VC is subset of PE, so all VC is PE but not all PE is VC. 05. Definition Private Equity (PE) PE is form of medium to long term investment consisting of equity stakes in potentially high growth companies that are usually not listed on a stock exchange. Types of investment in PE 1. Capital investment into an operating company. 2. Acquisition of an operating company 05.  Investment Strategies of Private Equity (PE) Leveraged buyout Takeover of company using a combination of equity and borrowed funds. Management buyout Private equity firm provides financing to enable the current operating management to acquire or but at least 50% of the business. Management buy in Purchased of business by an outside team of managers who have found financial backers and plan to manage the business actively themselves. Mezzanine financing Stage of venture financing for a company immediately prior to its IPO Growth capital Pool and manage money from investors seeking private equity stakes in small and medium size enterprise with strong growth potential. 06. Instruments of Venture Capital and Private Equity 1. Origination PE and VC looking for potential deals. Process involves screening and evaluating investment proposals, conducting site visit, and conduct the valuation of target companies Investors commonly directly approach the target company which has growth potential to grow. 08.  Instruments of Venture Capital and Private Equity 2. Execution Involves negotiating, structuring, approval and deal closing as well as post acquisition monitoring involve PE and VC will negotiate investment entry terms and conditions, structuring the types of investments and instruments used and drafting the legal documentation. 08.  Instruments of Venture Capital and Private Equity 3. Exit stage Involves scrutiny check on the cash flow, dividends and redemption of preference shares. The typically exit strategy might involve share (trade) sales, buyouts and IPO. 08.  SHARIAH ASPECTS 1. Mudharabah (Profit Sharing Contract) Contract made between two parties to finance a business venture Capital provider known as rabb al mal who solely provides capital and mudarib (entrepreneur) who solely manages the project. 09.  SHARIAH ASPECTS 2.Musyarakah (profit and loss sharing) ·Partnership between two parties or more to finance business venture where all parties contribute capital either in the form of cash or in-kind. ·Profits are shared based on pre-agreed ratio. 09.  SHARIAH ASPECTS 3.Wakalah (agency contract) ·Based on agency contract where a party (principal) authorizes the other party (agent) to act on behalf based on agreed term and conditions. ·Power and rights are given to the agent to act on behalf of the principal as long as principal still exist. ·Two types of wakalah contract. Which are: - Wakalah Ammah (general agency) - Wakalaj Khassah (specific agency) 09.  Differentiate Between PE and VC 09.  LEGAL AND REGULATORY FRAMEWORK 09. DIFFERENCES BETWEEN SYARIAH AND CONVENTIONAL VENTURE 10.  Similarities between Syariah and Conventional Venture Investment in the form of equity Return based on the performance of the investment Long term and value added investment 11. Thanks you 14.