Question

These questions are from textbook - Venture Capital, Private Equity, and the Financing of Entrepreneurship

Chapter 7

1. Exits are ultimately how private equity firms realize returns on their investments. Describe the various ways for a private equity firm to exit an investment.

2. What are some of the key considerations in determining whether to take a company public?

3. What are some of the possible explanations for why acquisitions account for a greater percentage of exits than IPOs?

4. What are some of the characteristics of a private company that may increase the likelihood of an IPO?

5. What are some of the characteristics of a private company that may prevent it from going public?

6. Why might the pursuit of an IPO elicit higher interest and/or offers from strategic acquirers?

7. What are some of the key advantages of being a public company? What are the disadvantages?

8. Why would a public company prefer institutional holders to comprise a large portion of their investor base? Who is responsible for attracting these investors? 9. Explain the phenomenon of underpricing as it relates to IPOs.

10. What is a “Green Shoe” and why does it exist?

11. What is a possible explanation for why a VC-backed company outperforms the market for several years after its IPO?

12. What purpose does corporate VC serve? What are the potential advantages?

Answer 1

Answer(2): If a company is private and needs funds for Expansion purpose or new product launch or for financing capital expenditures then company issues either shares or debentures, if company issues shares, it has to come up with Initial public offering so as to get listed on the exchange.

Answer(5): A private company that wants to expand its operations and needs funds but does not want to come up with IPO or does not want to go public then it has several other options of raising funds:

1. Private equity
2. Bank loan
3. Venture capital
4. Hire purchase
5. Assets securitization

Answer(7): Key advantages of being a public company-

1. Company can get more funds from public, better capital access.
2. Liquidity of company increases, shareholders can easily buy and sell shares through exchange.
3. It gets prestige and brand value increases in the market.
4. Its market capitalization increases and it can expand its business.

Disadvantage of being a public company-

1. Company's share is more volatile, it keeps fluctuating due to any micro and macro economic news.
2. Company has many number of external shareholders that have ownership and voting rights in company.
3. Company has to pay cash dividend to shareholders that decreases cash in the company and also has to concentrate on shareholder's wealth maximization.

Answer(9): Under pricing in IPO- Under-pricing is considered when share price that is offered to public is very low. IPO is the initial public offering through which, company gets listed in the stock market and becomes public.

Some companies underprice their IPO, it means the value of share, offered to shareholders is less that the actual value. Typically companies underprice the IPO when they see, demand is less.