To Nobilis Global, Venture capital is a broad subcategory of private equity that refers to equity investments made, typically in less mature companies, for the launch of a seed or start-up company, early stage development, or expansion of a business. Venture investment is most often found in the application of new technology, new marketing concepts and new products that do not have a proven track record or stable revenue streams.
Nobilis Global Venture capital is often sub-divided by the stage of development of the company ranging from early stage capital used for the launch of start-up companies to late stage and growth capital that is often used to fund expansion of existing business that are generating revenue but may not yet be profitable or generating cash flow to fund future growth.
Entrepreneurs often develop products and ideas that require substantial capital during the formative stages of their companies' life cycles. Many entrepreneurs do not have sufficient funds to finance projects themselves, and they must therefore seek outside financing. The venture capitalist's need to deliver high returns to compensate for the risk of these investments makes venture funding an expensive capital source for companies. Being able to secure financing is critical to any business, whether it is a start-up seeking venture capital or a mid-sized firm that needs more cash to grow. Venture capital is most suitable for businesses with large up-front capital requirements which cannot be financed by cheaper alternatives such as debt. Although venture capital is often most closely associated with fast growing technology, healthcare and biotechnology fields, such as what is Nobilis Global core business, but venture funding has been used for other more traditional businesses. Investors generally commit to venture capital funds as part of a wider diversified private equity portfolio, but also to pursue the larger returns the strategy has the potential to offer. However, venture capital funds have produced lower returns for investors over recent years compared to other private equity fund types, particularly buyout. This is why many of the larger investment requirements are secured by working with European bank contracts that guarantee a high return, protects the investor, and insures sustainability for the project.
Distressed or Special Situations is a broad category referring to investments in equity or debt securities of financially stressed companies. The "distressed" category encompasses two broad sub-strategies including:
• "Distressed-to-Control" or "Loan-to-Own" strategies where the investor acquires debt securities in the hopes of emerging from a corporate restructuring in control of the company's equity;
• "Special Situations" or "Turnaround" strategies where an investor will provide debt and equity investments, often "rescue financing" to companies undergoing operational or financial challenges.
• In addition to these private equity strategies, hedge funds employ a variety of distressed investment strategies including the active trading of loans and bonds issued by distressed companies.
Secondary investments refer to investments made in existing private equity assets. These transactions can involve the sale of private equity fund interests or portfolios of direct investments in privately held companies through the purchase of these investments from existing institutional investors. By its nature, the private equity asset class is illiquid, intended to be a long-term investment for buy and hold investors.
Secondary investments provide institutional investors with the ability to improve vintage diversification, particularly for investors that are new to the asset class. Secondaries also typically experience a different cash flow profile, diminishing the j-curve effect of investing in new private equity funds. Often investments in secondaries are made through third party fund vehicles, structured similar to a fund of funds although many large institutional investors have purchased private equity fund interests through secondary transactions. Sellers of private equity fund investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds.
Other strategies that can be considered private equity or a close adjacent market include:
• Real Estate in the context of private equity this will typically refer to the riskier end of the investment spectrum including "value added" and opportunity funds where the investments often more closely resemble leveraged buyouts than traditional real estate investments. Certain investors in private equity consider real estate to be a separate asset class.
• Infrastructure investments in various public works (e.g., bridges, tunnels, toll roads, airports, public transportation and other public works) that are made typically as part of a privatization initiative on the part of a government entity or the development of a privately funded town.
• Energy and power investments in a wide variety of companies (rather than assets) engaged in the production and sale of energy, including fuel extraction, manufacturing, refining and distribution (Energy) or companies engaged in the production or transmission of electrical power (Power).
• Merchant banking: negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies.
• Fund of funds investments are held in a fund whose primary activity is investing in other private equity funds. The fund of funds model is used by investors looking for:
• Diversification but have insufficient capital to diversify their portfolio by themselves
• Access to top performing funds that are otherwise oversubscribed
• Experience in a particular fund type or strategy before investing directly in funds in that niche
• Exposure to difficult-to-reach and/or emerging markets
• Superior fund selection by high-talent fund of fund managers/teams
• Royalty fund is an investment that purchases a consistent revenue stream deriving from the payment of royalties. One growing subset of this category is the healthcare royalty fund, in which a private equity fund manager purchases a royalty stream paid by a pharmaceutical or technology company to a drug patent holder. The drug patent holder can be another company, an individual inventor, or some sort of institution, such as a research university.
Returns on private equity investments are created through one or a combination of three factors that include: debt repayment or cash accumulation through cash flows from operations, operational improvements that increase earnings over the life of the investment and multiple expansion, selling the business for a higher price than was originally paid. A key component of private equity as an asset class for institutional investors is that investments are typically realized after some period of time, which will vary depending on the investment strategy. Private equity investments are typically realized through one of the following avenues:
• an initial public offering (IPO) – shares of the company are offered to the public, typically providing a partial immediate realization to the financial sponsor as well as a public market into which it can later sell additional shares;
• a merger or acquisition – the company is sold for either cash or shares in another company;
• a recapitalization – cash is distributed to the shareholders (in this case the financial sponsor) and its private equity funds either from cash flow generated by the company or through raising debt or other securities to fund the distribution.
Large institutional asset owners such as pension funds (with typically long-dated liabilities), insurance companies, sovereign wealth and national reserve funds have a generally low likelihood of facing liquidity shocks in the medium term, and thus can afford the required long holding periods characteristic of private equity investment. The median horizon for a LBO transaction is 8 years.
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