Last Updated on April 9, 2023 by Tabraiz
Today as never before, it is of primary importance that professionals and businesses know the existence and the possibility of resorting to Alternative Forms of Finance, other than recourse to bank credit. Two of these are Private Equity and Venture Capital.
Private Equity and Venture Capital: Alternative Financing Instruments for Companies
By Private Equity, which can be translated into private investments and/or private assets, we simply mean the contribution of new capital within a target (typical) company.
In particular, these are venture capital investments.
But what exactly is it, what does it invest in and why is it defined as risky? In simple terms, it is capital that enters a company as additional finance to provide for its development.
What is meant by Risk Capital?
It is the portion of capital contributed by subjects who participate directly in business risk (a concept linked to the management and entrepreneurial choices in running a company, which combine to DarkComet produce results that can be positive or negative and therefore give rise to profits or losses), and does not consist only in the contribution of new finance, but also of experience, strategy, skills, know-how, by specialized operators (investors) who choose to invest and “bet” in companies, in their opinion, particularly promising.
Who are the Investors?
Funds or natural persons (business angels) usually invest in risk capital, who choose to make their savings bear fruit by on the growth of a company.
How do you invest in venture capital?
Through the purchase of shares in the share capital or bonds issued by the company, with the aim of monetizing the investment (capital gain) once the value of the shares and/or bonds has significantly increased.
How many types of investment are there?
In reality, there are different types that are distinguished on the basis of the life cycle of the company and/or on the basis of the purpose to be achieved with the Private Equity operation. To simplify, there are 4 types of financing :
● Financing in the Start-up Phase of the Company (so-called Early Stage or Venture Capital)
This form of financing takes the name of Venture Capital, aimed at generally Supporting the Start-up of the Company, including the planning phase, normally intended for Start-Up Innovative (innovative companies). A venture capital fund invests primarily in equity capital in firms that are too risky for standard capital markets or bank loans. Often the same name is given to specially created funds, while the subjects who carry out these operations are called Venture Capitalists.
● Financing in Development Phase (so-called Expansion)
This form of financing is aimed above all at supporting the growth of the company, also in internationalization projects (the term internationalization refers to those processes through which companies invest in foreign markets, with the precise aim of progressively conquering market shares). This type of loan is aimed at already consolidated companies, where further recourse to bank financing would result in an increase in financial charges, putting the balance of the company’s financial structure as a whole at risk.
● Financing in the Change Phase (so-called Replacement)
This form of financing is aimed at supporting the processes of change of the company itself, changes that concern the ownership structure of the same. Indeed, the Replacement Capital is carried out by the institutional investor in situations, for example, in which a shareholder needs to be replaced. This hypothesis usually occurs on the occasion of succession transfers in family businesses. So the intervention of private equity funds guarantees the continuity of business operations and the stability of the entrepreneurial fabric.
● Financing in the Crisis Phase (so-called Turnaround)
This form of financing is aimed at Target Companies that are in Difficult Conditions. The interventions that fall within this phase are aimed at lengthening the debt or at lightening it by prompting the creditor banks to convert their credits into shares of the target company. Very often the Turnaround Operations are aimed at companies subject to bankruptcy proceedings (bankruptcy, etc.) and are aimed at the recovery of the company itself, through the establishment of purpose-built vehicle companies, to fully and/or partially acquire the company in crisis, sometimes even through the rental of a branch or the entire company.
A Real Alternative to Finding Traditional Financial Means
In the panorama just described, it is clear how Private Equity and Venture Capital instruments represent SMEs (small and medium-sized enterprises) in fact a Real Alternative to Finding Traditional Financial Means (bank credit), in order to increase their size and compete in the markets.
In reality, the role that these Alternative Finance Instruments can have for companies is different and notable, here are some examples :
- support the growth of companies
- guide management toward the creation of value
- facilitate generational turnover and/or the entry of new members
- facilitate the expansion of markets
- governance systems improve
- support and facilitate economic development
- they help to overcome economic crises and insolvency situations
- they improve the economic-financial communication of the company
Considering the instruments just illustrated as well as the causes of the current difficulty of the Italian economy, represented essentially by the small size of the companies, the development also in the Italian market of operators specialized in the contribution of venture capital, who operate with a medium-long term period, is necessary in order to support entrepreneurs in the growth of their businesses.
However, this desirable development requires a cultural evolution that leads entrepreneurs to open up the capital of their businesses without fearing losing control of it, because in fact operations of this kind represent a real springboard.