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Chapter 6

CFIN501- Chapter 6- The Stock Market.docx

5 Pages
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Department
Finance
Course Code
FIN 501
Professor
Edward Blinder

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CFIN501 Chapter 6 The Stock MarketPrivate Equity VS Selling Securities To The PublicPrivate EquityPrivate equitylabel the financing for nonpublic companiesVenture capitalfinancing for new often highrisk venturesThe Structure Of Private Equity FundsPrivate equity funds and hedge funds share some characteristicsoInvestment companies set up as limited partnerships Pool money from investorsinvest money on behalf of investorsoBuilt in constraints to prevent fund managers from taking excessive compensationClaw back provisionmake sure manager receives only the agreed upon performance feeoFee paid reduces the net return of the fundDo not take any performance fees until fund is liquidatedoPerformance fee for private equity firmscarried interestProvide diversification benefitsnight not be a reasonable choice for investorsoMust be a qualified investor richoFunds are really illiquidmore illiquid than hedge fundsTypical private companies started by raising money from investorsoManagers invest in private companiesintention of improving them and subsequently existing IPOoStated life of 710 years makes for a illiquid investmentTypes Of Private Equity FundsVenture capitalfinancing for new often high risk venturesoRecognize many or even most new ventures will not fly occasional one willoPotential earnings are enormousoLimit riskprovide financing in stages enough to reach each milestoneoSpecialize in different stagesSeed moneyMezzanine levellevel just above the ground floor debt or equityMiddle marketthese companies are an on going concern with known performance historyoSmall many are family operated and ownedoNeed capital if they wish to expand beyond their existing regionoFounders of firm want to retire from the businessLeveraged buyoutstaking company private using borrowed moneyoActivity level in the market depends on credit marketsSelling Securities To The PublicGoal of private equity fundsinvest in a private companyimprove performance and then exit business with a profitoExisting business selling to another investor or sell firm to general publicPrimary marketnew securities are originally sold to investorsoCompanies issue new securities to raise moneySecondary marketpreviously issued securities trade among investorsoInvestors constantly appraising values of companies by buying and selling shares previously issued by these companiesThe Primary Market For Common StockInitial public offeringcompany offer stock for sale to the public for the first timeoCompany is small and growingneeds to raise capital for further expansionoUnseasoned equity offeringshares are not available to the public before the IPOSeasoned equity offering SEOsale of additional shares of stock by a company whose shares are already publicly tradedoSecondary and following also refers to SEOoCan be made using a general cash offer or a rights offerGeneral Cash Offerissue of securities offered for sale to the general public on a cash basisoSecurities are offered to the general public on a first come first served basisRights offerpublic issue of securities in which securities are first offered to existing shareholders1
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