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External Financing (EQUITY =ownership (PRIVATE EQUITY (EXITS OF…

- - - - Acquisition by another company
        51% sold
      - secondary buyout
      - IPO (go public)
    - - Venture Capital
        
        General Partners:
        
        make decisions
        
        personal liability (rights and privileges)
        
        Limited Partners
        
        only provide money, no management
        
        limited liability
        
        Fee:
        
        2&20: 2% management fee, 20% incentive fee
      - Angel Investors;
        
        first-round
        
        early stage
        
        seed financing
      - Other
        
        Institutional Investors: pension funds, insurance company, university endowments, foundations
        
        Corporate Investors
        
        Crowdfunding
  - - - Benefits
        
        For the company:
        
        more capital
        
        market timing for higher evaluation
        
        publicity/status
        
        For Investors:
        
        Capital gain from exits
        
        Better liquidity of their ownership
        
        Diversify portfolio
      - Process
        
        Parties:
        
        IPO Firm
        
        Underwriter (investment banks, provide valuation to IPO firm, buy shares at a discount, do road show, sell shares
        
        Road show investors (mutual funds, hedge, pension)
        
        Retail investors
        
        Procedure:
        1) choose type of IPO (firm commitment, best-efforts basis, auction IPO)
        2) share valuation
        3) Documentation (red herring, final prospectus)
        4) Road show and book building
        5) determine underwriter spread
        6) sell the rest to public
      - Costs
        
        For company:
        
        high fixed cost to go public
        
        loss of cofidentiality
        
        loss of controll and ownership
      - IPO PUZZLES:
        
        short-term underpricing
        
        long-term underperformance
        
        strong cycle
        
        high costs
    - - Process
        
        Cash offer: offer new shares to new investors
        
        Rights offer: offer new shares to current shareholders at a lower price, but the share price become the average and do not that the price applied to the right offer
      - Price reaction
        usually drop because it is a bad signal
      - Costs
- - - - Revolving line of credit
        Asset-backed line of credit
      - Syndicated bank loan (group of lenders)
        
        shared risk
        
        experience
        
        knowledge
      - Term loan
  - - - Secured bond (collateral; physical)
      - Unsecured bond: higher return, higher risk because there is not collateral and it is ranked to a lower level in term of payment
    - - INDENTURE (like a prospectus)
      - REPAYMENT PROVISIONS:
        
        Sinking funds
        good for issuer, higher coupon
        
        Call provision: the company can call the bonds back and pay at the call price
        good for the issuer, higher coupon rate (yield)
        
        Convertible Provision (Face value/convertion ratio=price conversion
        good for holder, lower coupon
        investor should convert the bond if the share price is higher than the bond price
      - TRADING AT:
        
        Discount: coupon rate<YTM
        
        Par: coupon rate=YTM
        
        Premium: coupon rate>YTM
    - - Low rating mean riskier bond -> higher interest rate
      - Rating Companies: S&P, Moody, Fitch