What is venture capital

What is equity

Private equity refers to investment strategies that invest in the equity capital of a private (unlisted) company, such as private equity issues or issues related to the equity capital of private companies.

Private equity investments are usually associated with higher risk than equity investments in the stock market, but also (perhaps because of this) the returns are usually higher as well. Another characteristic of this type of investment strategy is that the investment horizon is usually long term, having a fairly high illiquidity component.

This structure may seem confusing, but the term “private equity investment” appears in all four levels. To clarify some doubts, we need to understand the structure of private equity.

Private equity firms play the role of intermediaries in the financial markets.  On the one hand, they raise funds (from investors who wish to obtain a high return) and on the other hand, they manage the investment of these funds. These firms operate with one or more venture capital funds. The partners, which are limited, usually institutional investors and to a lesser extent wealthy individuals, provide the majority of the fund’s capital. In this way, the partners invest in the venture capital fund rather than directly in the company. Each of the venture capital funds has a portfolio of companies in which it invests the funds raised.

Venture capital fund

The venture capitalist seeks to take a stake in companies that belong to dynamic sectors of the economy, which are expected to have above-average growth. Once the value of the company has increased sufficiently, venture capital funds withdraw from the business, consolidating their profitability. The main exit strategies that are considered for an investment of this type are as follows:

Venture capital operates by evaluating the business plan of the projects presented to them by the entrepreneurs through Investment Committees, which analyze the advisability of entering into the shareholding of these companies. For each business sector there are specialized funds that can help and push a business idea financially. Always from the business point of view, taking the best financing option at the time of applying to the capital funds.[4] In general, the Newco receives a loan from the Newco, which is a loan from the Newco.

In general the Newco receives a loan from financial entities that is destined together with the own resources injected by the shareholders to pay the acquisition price of the shares of the company object of the purchase. The acquisition loan is initially secured by a pledge on the purchased shares since the granting of collateral on the assets of the target company would violate the rules prohibiting the granting of financial assistance by a company for the acquisition of its own shares.

Venture capital, what it is

The venture capitalist seeks to take participation in companies that belong to dynamic sectors of the economy, which are expected to have above-average growth. Once the value of the company has increased sufficiently, venture funds withdraw from the business, consolidating their profitability. The main exit strategies that are considered for an investment of this type are as follows:

Venture capital operates by evaluating the business plan of the projects presented to them by the entrepreneurs through Investment Committees, which analyze the advisability of entering into the shareholding of these companies. For each business sector there are specialized funds that can help and push a business idea financially. Always from the business point of view, taking the best financing option at the time of applying to the capital funds.[4] In general, the Newco receives a loan from the Newco, which is a loan from the Newco.

In general the Newco receives a loan from financial institutions that is destined together with the own resources injected by the shareholders to pay the acquisition price of the shares of the company object of the purchase. The acquisition loan is initially secured by a pledge on the purchased shares since the granting of collateral on the assets of the target company would violate the rules prohibiting the granting of financial assistance by a company for the acquisition of its own shares.

Seed capital

Like any financial product, the definition, typology, characteristics and activity of venture capital are regulated by the State. In this case, by Law 22/2014 regarding closed-end collective investment, a category to which it belongs.

Taking these details into account, venture capital could be defined as “those investment strategies that channel funding directly or indirectly to companies, maximize their value by generating professional management and advice and disinvest in the same with the aim of providing high capital gains for investors”.

For this reason, this type of investment is not advisable for those seeking security, but for those who are sufficiently solvent to face the loss of the entire investment without consequences.

The origin? 72% of the total capital invested came from international funds, which is an important capital attraction. The destination? Mainly Hospitality and Leisure (25.7%), followed by Consumer Products and Communications (around 10%).

Eduardo José Cazorla