INTERINVESTCORP_AI VCs Hedge Funds and Private Equity Investo

8/6/2019 INTERINVESTCORP_AI VCs Hedge Funds and Private Equity Investo

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Angel Investors,Venture Capitalists,Hedge Funds and

Private EquityInvestors

February 09 2011


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Economics of Investment

Certain economic agents (individuals, householdsand corporations) have excess of income over theirconsumption (because of their plan to defer

consumption). Certain other agents need more money than they

have (temporarily).

Intermediaries exist who bring together the above

two types for economic gains (commissions,brokerage).


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HNWI

Households

Corporates

Angels

Banks

Mutual Funds

PensionFunds

Insurance Cos

Hedge Funds

VentureCapitalFunds


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Angels

Hedge Funds

Banks

Mutual Funds

Pension Funds

Insurance Cos

VC Funds

Fixed Income

Securities

Forex

Commodities

Startups &PrivateEquity


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Nature of these investors

Unconventional

Make highly risky investments

Deal with difficult Asset Pricing and Valuation

Are free of regulatory issues


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Target Companies

Startups

Early stage companies Private companies in the scale-up phase

Pre IPO financing rounds


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Sources of Finance

Equity (common stock, preferred stock)

Loans: long term, short term

Lease finance

Inter corporate deposits

Bank cash credit and overdraft limits Debentures

Fixed deposits

Grants from government agencies Supplier credit and deferred payments

Credit cards


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Modes of Acquisition

Primary market: public issue, rights issue(flotation costs)

Secondary market (listing costs)

Private placement (individual orinstitution)

Banks and mutual funds

Pension funds, insurance companies Debenture issue

Fixed deposits


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How to compare various sources ?

Holding period (Duration)

Repayment terms

Interest rate

Other strings attached

Pledges and collaterals

Finance marketing costs and lead time


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Net Present Value (NPV) of an Investment

Horizon of interest: Typically 4 5 years

Expected future cash flows: Dividends, interests

Residual value at the end of horizon: Marketprice

Risk-free rate of return: Government bonds

Risk premium: Investor dependent


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Example: Angel Investment

Three to five year horizon

No dividend / interest

IPO Price is the residual value

Risk-free rate of return: 5 % (Bonds, Treasury bills)

Risk premium: 20-40% (Early stage investment)


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NPV of an Asset (Stock, Bond)

Discounted Cash Flow Analysis

NPV = CF1 / (1.0 + r) + CF2 / (1.0 + r)2

+ CF3 / (1.0+r)3

+ RV / (1.0 + r) 3

r = Expected rate of return

CF i = Cash flow at the end of ith year

RV = Residual value of the asset

Discounting is the reverse of compounding

Where


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Funds Requirements

Idea / Concept: USD 10K

Prototype: USD 50K

Product development: USD 0.5M 2M

Organization building: USD 8M-10M

Scale up: USD 50M

IPO: Initial Public Offer


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Sources of Funds

Idea / Concept: Personal savings

Prototype: Loan from friends and relatives

Incubation: Angel / Early stage fund

Organization building: VC, first round

Scale up: Second round / growth/ scale upfunds

IPO: Investment bankers, underwriters


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Cost of Equity

Angels would expect higher rate ofreturns than VCs

Typical VC expectations is 40-50%compounded annual return

Risk-return curve: New ventureincreasingly reduces its risk as it goesthrough stages


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ANGEL INVESTORS

High Net Worth Individuals

Successful serial entrepreneurs (alsoparallel entrepreneurs)

Good knowledge of technology andbusiness acumen

Have country-specific preferences (NRI,NRC)

Hunt in packs


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Peculiarities of Angel Investment

Quick decision-making

Low level of funds

One-two days a week of commitment after allthey are putting their own money on the table!!

Uncle-nephew relationship


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VENTURE CAPITAL FIRMS

VCs look for private equity for youngcompanies

Mezzanine VC firms

Scale-up VC firms Technology / Space specific

Biotechnology

Networking

Chips and hardware

E Commerce


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Structure of a VC Firm

General partners 3-5 (themselves successful entrepreneurs):put about 2-3% of the corpus

Limited partners (Pension funds, Retirement plans): Put 97%corpus

Corpus = Fund, typically ranges between USD 50M to 2B

Management fee is about 2-3 % per year

Funds about 5-30 new companies per year

Employs junior managers for due diligence(associates) After IPO/Acquisition, general partners keep 20% of gains,limited partners get Principal+80%


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VC Firms Annual Throughput

10,000 qualified business plans

1000 meetings

400 company visits

25 new investments


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Role of the VC in the Portfolio Company

Negotiate aggressive terms

Select strong co-investor

Help in constituting the Board of Directors

Assist in Recruitment

Market validation

Strategic relationships

Pursue liquidity aggressively


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Valuation: Bargaining Point

Causes of mismatch

Asymmetry of information

Ego Greed

Factors that drive the valuation

Technology, ESOP rates, management

Orders in hand, scalability, brand strength

Patents and copyrights


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Difficulties in Valuing Start-upCompanies

Immediate earnings are negative

No past history

No comparable companies

No market prices


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VC Fund Raising Process

Introduction (phone call, e-mail, referral)

Submit business plan / executive summary

Presentation

Company visit Due diligence (management reference checks,

customer calls, market analysis)

More meeting(s)

Term sheet

Legal / Closing


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Innovations in Financing Terms

Third party collaterals

SIDBI

USA Small Business Administration

Flexible, milestone-based equityconversion options and release of funds intranches


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Worldwide Kleiner Perkins

Sequoia Capital

Battery Ventures

Newbridge

Chrysalis Capital

Acer Technology Ventures

Westbridge Capital

Technology Capital Investors

Andreessen Horowitz

Greylock Partners


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HEDGE FUNDS

Hottest and most talked about in the businesspress

Started by ex-Wall Streeters

Quantum Fund : George Soros

LTCM: Long Term Capital Management (MyronScholes and Robert Merton, 1997 EconomicsNobel)


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Hedge Funds: Privileges and Promises

Not scrutinized by SEC Ask for long term commitment from

investors : 6 months to 2 years

Take simultaneous positions in securities,commodities, Forex and Bond markets

Global (Transnational operations)

Promise absolute return irrespective ofmarket trends and movements


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Hedge Fund Strategies

Fixed Income Arbitrage Equity market-neutral statistical arbitrage

Convertible Arbitrage

Merger Arbitrage Distressed securities

Event-driven strategies

Macro investors: EIC Analysis Sector-specific positioning


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PRIVATE EQUITY INVESTMENT

Large, profitable private limited or deemed

public companies who need finance but dontwant to do an IPO


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Some Deals

Company Investor Investment

USD mill

Approx

Valuation

Progeon Citigroup 20 100

Glenmark

Pharma

CDC Capital 10.3 74

TV Today ICICI Ventures, GE

Capital

1.5 25

Patni Computers General Atlantic

Partners, GE Capital

108 530

Strand Genomics Westbridge Capital

Partners

4.6 9.5


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INTERINVESTCORP LLC

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INTERINVESTCORP_AI VCs Hedge Funds and Private Equity Investo

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