Capital-investment

The capital-investment is a financial activity consisting in for a Investisseur entering to the Capital of Société S which needs Stockholders' equity. The term of capital-investment generally relates to the investment in companies not - dimensioned in Bourse (from where its non quoted name of capital or private equity in public English in opposition at the end ). In French that corresponds to the concepts of capital closed in opposition to the open capital.

The companies which constitute a wallet participations by carrying out operations of capital-investment are investment companies or Fonds of investment.

The capital-investment is declined in several forms:

the Venture capital to finance the starting of new companies.
the Capital-development to finance the development of the company.
capital-transmission or LBO intended to accompany the transmission or the transfer by the company.
capital-reversal to help with the rectification of a company in difficulty.

Methods and speakers

The operations of capital-investment are carried out:

either by purchase of existing titles near former shareholders,
or by contribution of new funds at the company, in the form of subscription of titles lately emitted by it (Capital growth).

They are carried out by:

of the companies or specialized funds of investment made up ad hoc , deprived or public, of industrial or financial origin (institutional capital-investment with in particular the Pension funds, the insurers and the banks),
of the fortunate and tested individuals (Business angel providential S or investors)

These operations often have recourse to a Action leverage, by privileging a financing by debt (banking loan).

Objectives, description and typology

Objectives

The investors in capital aim at the realization, by the transfer or the sale of their share with more or less long run (3 to 10 years according to the economic sectors) of appreciations. This “exit” can be made either Private, or by Going public.

Concept of private equity (titles not - dimensioned)

The English term private equity indicates the financial titles of companies (in particular the actions for the joint stock companies, or the partnership shares for the partnerships) which are not with dimensions on a market, in opposition to public equity , which indicates titles which were the subject of procedures of public quotation on a market.

The lawful obligations and guarantees of the private equity are thus less and their liquidity much weaker, because of greater difficulty of yielding them by private contract . To compensate for this aspect, the capital-investment aims at performances of long run higher than those of the financial markets.

Segments of speakers

The capital-investment breaks up into several segments with the following characteristics:

Capital of starting (known as also Capital-starting): the investors in Capital of starting, generally of the natural persons, bring capital, like their networks and experiments with entrepreneurial projects which reach yet only the stage of the Research and development. The objective of this phase, very risky on the financial plan, is to finalize the development of a technology in the shape of prototype making it possible to validate the success of the technological bet, and to start to test the existence of a market. The signature of a first customer ensures the transition at the stage from the capital risks.

Venture capital: the investors in Capital-risque bring capital, like their networks and experiments with the creation and the first developmental stages of companies innovating at strong potential. The term “risks” used in France (in the other countries, one generally employs the term of capital Venture ), badly translated the aspect of " venture entrepreneuriale" , which returns the trade of investor in capital basically different from the purely financial trades. The few projects which succeed must more than to compensate for the losses of capital of those which fail.

Capital-development: the capital-development relates to companies which crossed the stage of the capital risks, and thus validated the potential of their market, and which have financing need additional to support and accelerate their growth; either their internal growth (financing of their Requirement in Working capital), or their external growth (acquisitions).

Capital-transmission: also known under English term LBO, (Leverage buy-out), these operations of Acquisition by loan consist in acquiring the totality of the capital of a profitable company, generally evolving/moving on a walk ripe, by a combination of capital and banking financings (structured debt). They allow a leader, associated with funds with capital-investment, to transmit its company, or more generally to prepare its succession by yielding its company in several stages (LBO with double relaxation).

Capital-reversal: the investors in capital-reversal generally acquire the totality (even a majority share) of the capital of a company in difficulty, then inject the financial resources there allowing the implementation of a recovery package.

History and results

This activity of investment in capital, initially developed by contractors with the the United States in the Silicon Valley after the Second world war on the one hand and in the large American universities (Stanford, MIT, etc) on the other hand, was established in Europe in the years 1970. Since this activity developed by cycle, according to the stock exchange risks, inciting fiscal policies and creation of new tools and vehicles for placement to stimulate and facilitate the collection of the funds. Thus the capital-investment raised 10 billion $ in 1991 compared with 459 billion in 2006.

In France for example, the creation of the Investment funds at the Risk (FCPR) in the years 1980, of the Investment funds for Innovation (FCPI) in 1996 and of the Funds of Investment of Proximity (FIP) in 2003, allowed the development of this activity, which remains however less important than in North America.

The capital-investment wiped the various economic crises and particularly the bursting of the Bulle Internet, thanks to a profitability proven on the long run .

Certain studies tend to show that the venture capital is favorable to the economic growth. For example, a study undertaken by Constantin Associés concludes that the French companies under LBO know an annual growth of their turnover of 5,6% compared with 0,7% for the national average. That is accompanied by a rise of manpower of 4,1% against 0,6% on average. Finally the evolution of the wages in the companies under LBO is of +3,3% against +2,9% on average.

One will note however that the carrier must be conscious, as for any type of placements, certainly of the prospects for profit, but also of the risk.

On the level of the financial performances . The appreciations carried out can be artificial when the funds of capital-investment resell participations rather Private between them than in (D) bringing the actions on purses where a broad supply and are confronted. The multiplication of such operations in closed circuit could moreover reduce the liquidity these stockmarkets.
On the level of the possibilities of resale of shares . The carrier of shares must sometimes wait until the funds succeeded in of the transfers of participation (or found new carriers) to find its money. Moreover, certain funds tend to be strongly involved in debt to create a financial Action leverage which can also pose problems of exit.

A placement for the pension funds, insurers and other informed people

This activity is in general managed by small specialized teams which collect near financial institutions of the funds placed in a financial vehicle ad hoc (in France in the legal form of a FCPR, with the Luxembourg in the form of SICAR).

These funds have one limited lifespan (10 years to the maximum) and, contrary to SICAV, are called according to the needs for one initial period for 3 to 5 years.

The funds of investment of type FCPR in France generally do not make a public call to the saving, this is why few natural persons there are met. Nevertheless, the Autorité of the Financial markets (MFA) defined a certain number of criteria defining the “informed person” of the risks of this class of credits.

Generally, a natural person will have to engage for a minimum amount of 500 000 euros. The minimum “ticket of entry” in a FCPR could be lowered to 30 000 euros according to whether:

the person is already investor in other FCPR,
it occupied at least for 12 months a financial function in a company, or it has a financial inheritance of at least a million euros in order not to over-expose it with this class of credits.

A solution for all the ambitious projects

The contractors carrying ambitious projects for their technologies find in this way of financing a single solution:

Initially the means available can be important.
But especially the “capital investors” brings their experiment and their contacts to share the strategic decisions and operational.

But of course it is necessary to share their vision and to know that they have clear objectives “to leave” at the end of a few years (4 to 7 years). What means setting out of purse or industrial transfer which makes their investment “liquid”. There can be conflicts on the strategic policy and the realization of financial objectives. It is thus advisable as well as possible to negotiate with the capital-risqueur the contractual framework of the investment.

The bubble of the private equity

The principal organizations of capital-investment invested into 2006 with the the United States the estimated sum of 290 billion euros in repurchases of companies. This sum was already of 220 billion in first half of the year of the year 2007, provocant the takeover of eight thousand companies in six months. Employees American on four and one paid French out of twelve would work right now for these companies.

The organizations of capital-investment realized overall, these last years, of the fulgurating performances, which led them to multiply their investments by taking increasingly high unit risks. One thus could speak about financial Bulle, in particular concerning the operations of size important (higher than 100 M€) and financed thanks to banking debt (LBO).

The recent rise of interest rates involved doubts about the capacity of these institutions, largely financed up to now by appropriations and obligations atlow rate, to not only continue to post the important ones more been worth, but still to resist changes of economic situation. The semisuccess of the going public of Blackstone in June 2007, the most important world group of capital-investment, gave a certain body to these concerns.

In addition, the tightening of the conditions of the loan on the financial markets or credit squeeze following the Crise of the subprimes in 2007 involved difficulties for many funds of raising the capital necessary to operations of important LBO. The market of the LBO in the United States and in Europe knows significant drops thus: the transactions represented 192,7 billion $ in first quarter 2007,320,6 with the second quarters and 107,8 with the third quarters.

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