**TI82** TxtView file generated by CalcText - Kouri† wchap23wuÿchap231) Sources of funding Angel Investors Individual Investors who buy equity in small private firms Finding angels is typically difficult. Venture Capital Firm A limited partnership that specializes in raising money to invest in the private equity of young firms Venture Capitalists One of the general partners who work for and run a venture capital firm Private Equity Firms Organized very much like a venture capital firm, but it invests in the equity of existing privately held firms rather than start-up companies. Private equity firms initiate their investment by finding a publicly traded firm and purchasing the outstanding equity, thereby taking the company private in a transaction called a leveraged buyout (LBO). In most cases, the private equity firms use debt as well as equity to finance the purchase. Institutional Investors Institutional investors, such as pension funds, insurance companies, endowments, and foundations, are active investors in private companies. Institutional investors may invest directly in private firms or they may invest indirectly by becoming limited partners in venture capital firms. Corporate Investors A corporation that invests in private companies Also known as corporate partner, strategic partner, and strategic investor Although most other types of investors in private firms are primarily interested in the financial returns of their investments, corporate investors might invest for corporate strategic objectives, in addition to the financial returns. 2) Initial Public Offering (IPO) The process of selling stock to the public for the first time Advantages Greater liquidity Private equity investors get the ability to diversify. Better access to capital Public companies typically have access to much larger amounts of capital through the public markets. Disadvantages The equity holders become more widely dispersed. This makes it difficult to monitor management. The firm must satisfy all of the requirements of public companies. SEC filings, Sarbanes-Oxley, etc. Underwriter An investment banking firm that manages a security issuance and designs its structure Best-Efforts Basis For smaller IPOs, a situation in which the underwriter does not guarantee that the stock will be sold, but instead tries to sell the sock for the best possible price Often such deals have an all-or-none clause: either all of the shares are sold on the IPO or the deal is called off. Firm Commitment An agreement between an underwriter and an issuing firm in which the underwriter guarantees that it will sell all of the stock at the offer price Auction IPO A method of selling new issues directly to the public Rather than setting a price itself and then allocating shares to buyers, the underwriter in an auction IPO takes bids from investors and then sets the price that clears the market. Underwriters and the Syndicate Lead Underwriter The primary investment banking firm responsible for managing a security issuance Syndicate A group of underwriters who jointly underwrite and distribute a security issuance SEC Filings Registration Statement A legal document that provides financial and other information about a company to investors prior to a security issuance Preliminary Prospectus (Red Herring) Part of the registration statement prepared by a company prior to an IPO that is circulated to investors before the stock is offered VAluation There are two ways to value a company: Compute the present value of the estimated future cash flows. Estimate the value by examining comparables (recent IPOs). Final Prospectus Part of the final registration statement prepared by a company prior to an IPO that contains all the details of the offering, including the number of shares offered and the offer price Book Building A process used by underwriters for coming up with an offer price based on customers’ expressions of interest Spread ( 7% of the issue price)à déduire de l'offer price = The fee a company pays to its underwriters that is a percentage of the issue price of a share of stock Lockup A restriction that prevents existing shareholders from selling their shares for some period, usually 180 days, after an IPO Underpricing Generally, underwriters set the issue price so that the average first-day return is positive. As mentioned previously, research has found that 75% of first-day returns are positive. The average first day return in the United States is 18.3%. The underwriters benefit from the underpricing because it allows them to manage their risk. The pre-IPO shareholders bear the cost of underpricing. In effect, these owners are selling stock in their firm for less than they could get in the aftermarket. Winner’s Curse Refers to a situation in competitive bidding when the high bidder, by virtue of being the high bidder, has very likely overestimated the value of the item being bid onÿÕü