Private/Public Equity Notes PDF

Issuing Shares to Raise Money Companies Issue Shares: Both public (companies listed on stock exchanges) and private companies can sell shares to raise money. People who buy these shares expect to make money in two ways: 1. Dividends: This is a portion of the company's profi...

Issuing Shares to Raise Money Companies Issue Shares: Both public (companies listed on stock exchanges) and private companies can sell shares to raise money. People who buy these shares expect to make money in two ways: 1. Dividends: This is a portion of the company's profits paid to shareholders. Not all companies pay dividends. 2. Capital Growth: This is when the price of the company's shares goes up over time, allowing the investor to sell them for a higher price than they bought them. Dividend Payments: These are typically paid out either once or twice a year, and they depend on the company’s financial performance. Companies decide whether to pay dividends, but the shareholders must approve it. Types of Shares Ordinary Shares: o These are the most common type of shares. o Ownership: Shareholders own part of the company and get a share of its profits. o Dividend: Ordinary shareholders don’t have an automatic right to dividends, and they get paid only after creditors (like banks) have been paid. o Voting Rights: Shareholders can vote on important company decisions. Preference Shares: o These shares also give ownership but with a twist: o Fixed Dividends: Preference shareholders usually get a fixed dividend, paid out before ordinary shareholders. o Cumulative Dividends: If dividends aren’t paid in one year, they accumulate and must be paid before ordinary shareholders can receive their dividend. o Voting Rights: Preference shareholders generally don’t vote unless there is a major issue affecting the company. Share Value Nominal (Par) Value: This is the face value of a share, set when the share is first issued. It’s the minimum price at which the company can issue the share. o Example: A share may have a nominal value of £1, but it might be sold for £10. o If shares are sold for more than the nominal value, the extra amount is called the "share premium." Market Value: This is the price at which shares are bought and sold on the market. It changes based on demand and supply. o Bid Price: The price at which someone is willing to buy shares. o Offer Price: The price at which someone is willing to sell shares. o The difference between these two prices is called the spread. For well- known companies with lots of trading, this spread is small. No Par Value Shares: In some countries like the USA, companies can issue shares without setting a minimum price, allowing more flexibility in pricing. Private Equity and Venture Capital  Private Equity: This is money invested in companies that aren’t publicly listed. Private equity investors aim for higher returns but take on more risk. o Venture Capital: This is a type of private equity where investors fund early-stage or small businesses with high growth potential. For example, venture capitalists might invest in a new tech startup. Venture Capital in the UK: Between 1984 and 2005, UK venture capital firms invested £62 billion in around 26,000 companies worldwide. After 2008, investment decreased due to the Global Financial Crisis. Private Equity Firms: Companies like Carlyle and Blackstone provide private equity. These firms may buy existing public companies, take them private, and avoid stock exchange rules. Hedge Funds What Are Hedge Funds?: Hedge funds are investment funds that use various strategies, often riskier than regular investment funds, to try to make high returns. They might borrow money to make larger investments. o Riskier Strategies: Some hedge funds take big risks, like betting against companies they think will fail (known as “short-selling”). o Short-Selling: This involves selling shares you don’t own yet, hoping that the price will drop so you can buy them back cheaper and make a profit. Criticism: Hedge funds are sometimes criticized for causing companies’ stock prices to fall, especially if they use short-selling to make money. They were blamed for making the 2007/08 financial crisis worse by targeting struggling companies. Private Equity vs. Public Offering Why Choose Private Equity Over Public Shares? 1. Availability: Some companies can’t raise money by selling shares to the public because they are too small, risky, or don’t have a proven track record. 2. Less Regulation: Private companies have fewer rules to follow, which saves time and money. 3. Faster: Raising money through private equity is usually quicker than going public. 4. Protection from Takeovers: Private companies are less vulnerable to being bought out (takeovers), unlike public companies that are more exposed. When to Go Public: As a company grows and becomes more successful, it may choose to go public and sell shares on the stock market. This is called an Initial Public Offering (IPO). Angel Investors Angel Investors: These are wealthy individuals who invest in very early- stage companies. They often bring more than just money—they offer their experience, skills, and contacts to help the business grow. Conclusion Companies can raise money by issuing shares (either to the public or privately) to finance their operations. There are different types of shares (ordinary and preference), and investors can expect returns through dividends or capital growth. Companies can also get funding from private equity, venture capital, or angel investors, especially if they don’t want to go public. Hedge funds, which take more risks to earn high returns, are another way for investors to try to make money, though they’re often seen as controversial due to their aggressive strategies. Private Equity vs. Public Equity 1. Private Equity: o Definition: This refers to investments made in companies that are not listed on the stock exchange. Instead, the shares of these companies are held by private investors or groups, such as venture capitalists, private equity firms, or even wealthy individuals (angel investors). o Types of Investors: In private equity, investors are typically institutions like private equity firms, hedge funds, or high-net- worth individuals who buy stakes in companies that are not publicly traded. o Funding Stage: Private equity is often used by companies in their early stages (through venture capital) or by more established companies that might be looking for money without going public. Private equity can also be used by large companies looking to go private (e.g., private equity firms buying a public company and delisting it). o Shareholder Control: Because private equity involves fewer investors, owners and managers often have more control over decisions without the pressure of public shareholders. o Exit Strategy: Investors in private equity usually aim to sell their stake after a period of time (typically 3-7 years), either by selling the company, taking it public (via an IPO), or selling to another private investor. 2. Public Equity: o Definition: Public equity refers to companies that raise money by selling shares to the general publicthrough a stock exchange, such as the New York Stock Exchange (NYSE) or London Stock Exchange (LSE). o Types of Investors: Investors in public equity include individuals (retail investors), institutional investors(like pension funds, mutual funds), and hedge funds. Public equity is much more accessible to a larger pool of investors. o Funding Stage: Public equity is generally used by mature companies that are already established and looking to raise funds for growth, acquisitions, or debt repayment. Companies often raise capital through an Initial Public Offering (IPO), where they first list their shares publicly. o Shareholder Control: When a company goes public, it shares control with its public shareholders, who can vote on major decisions (like electing the board of directors, mergers, etc.). Public companies also have to disclose a lot of information about their operations, which can limit the freedom of management.  o Exit Strategy: For public investors, the exit is typically easier, as they can sell shares on the stock market at any time. Why Might a Company Prefer Private Equity Over Public Equity? Here are four key reasons why a company might choose private equity over going public to raise money: 1. Less Regulation and Lower Costs: o Private Equity: When a company raises funds privately (through private equity), it avoids many of the strict regulations that public companies must follow. For example, public companies must comply with reporting requirements (like quarterly financial reports), audits, and disclosure of sensitive information(such as executive salaries or future plans). These rules are costly and time-consuming to maintain. o Public Equity: Public companies face much more scrutiny from regulators, investors, and the media. The cost of listing on a stock exchange (like underwriting fees, legal costs, and ongoing compliance expenses) can be significant. Additionally, the company must spend resources on quarterly earnings calls, investor relations, and other obligations that private companies don’t face. 2. Faster and Easier Process: o Private Equity: Raising money through private equity is generally quicker and involves less paperworkthan going public. Private equity investors are usually more flexible in negotiating deals, and companies can raise money in a matter of months instead of the lengthy process required for an IPO. o Public Equity: Going public through an IPO is a long and complex process that can take many months(sometimes even over a year). It requires hiring investment banks, lawyers, and accountants, and involves public disclosure of financial and operational details, which some companies might prefer to keep private. 3. More Control and Flexibility: o Private Equity: By raising money privately, a company can avoid the pressure from public shareholdersand keep control over major decisions. The company’s management team and private investors can work together without the need to answer to hundreds or thousands of public shareholders. This also means the company can take more strategic risks without worrying about short-term market reactions. o Public Equity: Once a company goes public, it must answer to public shareholders who often want short-term gains, which can pressure management to make decisions that prioritize short-term profits over long-term growth. Public companies also have to disclose more information, which can lead to more public scrutiny. 4. Avoiding Hostile Takeovers: o Private Equity: If a company raises funds privately, it can avoid being vulnerable to a takeover by a larger company or investor. When a company is publicly traded, its stock can be bought by any investor, and if an investor buys enough shares, they might take control of the  company (through a hostile takeover). Private companies have more protection against this. o Public Equity: Public companies are more exposed to hostile takeovers because anyone can buy their shares on the open market. Investors who want control of the company can buy up shares and take over the business, which can be destabilizing for the existing management and owners. When Would a Company Consider Going Public? While private equity has its advantages, there are situations where going public makes sense: Access to More Capital: If a company needs large amounts of capital (more than it can raise through private equity), going public is a way to raise substantial funds. This is particularly true for large-scale projects, international expansion, or acquisitions. Brand Visibility: Going public can give a company more brand recognition and credibility in the marketplace. It may also help attract talented employees (through stock options) or secure favorable deals with suppliers and customers. Liquidity for Investors: Public equity offers a liquid market for investors. Private equity investors might face challenges exiting their investments, whereas public investors can easily buy and sell shares. Summary Private Equity: Involves raising money privately from a small group of investors. It’s quicker, less regulated, and offers more control to the company’s management. However, it’s typically available to companies in earlier stages of growth or those that want to avoid public scrutiny. Public Equity: Involves selling shares on the stock market to a large group of public investors. It gives a company access to more capital, greater liquidity, and visibility. However, it comes with more regulation, higher costs, and less control for the management team. Some companies prefer private equity because it offers flexibility, faster access to funds, and avoids the burden of dealing with public investors and regulatory requirements. Others may go public if they need more capital or want to offer liquidity for existing investors.