Venture Capital

Broadly defined, Venture Capital (VC) is funds invested or available for investment in potentially highly profitable enterprises at considerable risk of loss. Venture capital is often used interchangeably with other terms such as risk capital, patient capital or equity financing.

Venture Capitalists are companies or individuals who provide investment capital, management expertise and experience. In return for their investment, Venture Capitalists will take an equity position in the company, usually in proportion to the amount of their investment and the level of risk involved. The future return on their investment is tied to the performance of your company.
A VC investment is typically longer term (4 to 7 years) and will often take a company through more than one business cycle.
Unlike more common debt instruments (i.e. chartered bank loans), the equity position in the company usually does not require regular payment. Instead venture capitalists will look for a capital gain and an increase in the value of their shares. This means the company has cash flow available for growth. This infusion of equity can create tremendous benefits for a company such as allowing for expenditure on capital equipment, providing working capital, or assisting growth strategies.

The future sale of a company, its going public, or other forms of appreciation in stock value will give the Venture Capitalist the needed return on investment. This return depends on the success of the company in which they invest. Thus, a company’s future and the Venture Capitalists future are integrally linked. In many ways a venture financier is a partner, not a lender. The company’s success is their goal.

As an investor-partner, the Venture Capitalist will take part in the management of the company, whether through its Board of Directors participation (standard) or providing management input on a regular basis (optional and negotiated). The Venture Capitalist will likely take an active role in helping the company grow, providing the most favorable environment for success and minimizing risk to his/her investment.

There are three criteria which differentiate VC's from the conventional secured lenders such as banks:

• the Venture Capitalist is secured by way of (common) equity or quasi-equity (the right to convert other debt instruments to common equity) investment in the company
  
• the investment is long term, typically 4 to 7 years
  
• there is active involvement in the business by the Venture Capital company

Typically, Venture Capitalists look for returns in the range of 30-40% per annum. They need a high rate of return since the investment carries a high level of risk and exposure, is locked in for a long period of time and offers no interim repayment.
Thus, the management team must continually strive to outperform and be fully committed to achieving exceptional growth. Without this commitment from management, the Venture Capitalist will not be willing to invest.

In summary, the Venture Capitalist can bring the following benefits to a company:

• common desire for success
  
• a partner and not a lender
  
• active Board of Directors participation
  
• experience
  
• contacts
  
• discipline
  
• credibility
  
• does not require regular payments

This article can be found at: http://www.acoa-apeca.gc.ca/e/financial/venture_capital_doc.shtml

Investment Banking

Investment banks serve as the middlemen between those organizations looking for capital and those with money to invest.1
Traditional investment banks are usually comprised of the following areas:

• corporate finance, including mergers & acquisitions and underwriting
  
• sales & trading
  
• research
  
• investment management
  
• asset management
  
• commercial banking services

In mergers and acquisitions, investment banks advise a company as it merges or buys another firm. With underwriting, the bank helps raise capital for a company, typically through the sale of stocks or bonds. 2

Typical path: Associate → Vice President → Managing Director

Within Corporate Finance, investment banks work with the sellers of securities. MBA candidates tend to be hired into “Associate” roles, where they can expect to spend three to five years before moving to a “Vice President” role, then to a “Managing Director” role.3 Associates spend significant amounts of time on financial modeling, creating pitch books, devising financial strategies and may interact with clients.4

Sales and research are good alternative entries in competitive industry
Positions in sales include retail brokers, institutional sales and private client services. Those in sales spend their time selling stocks and stock advice to individuals, as well as to large institutional investors. Traders facilitate the buying and selling of financial instruments, including stocks, bonds and various other securities. Within Research, Analysts or Associates are typically responsible for conducting research on a large number of stocks within a given industry.5 These roles can provide some alternatives for entering the investment bank marketplace given the extremely competitive nature of the top-tier investment jobs.

Long hours balanced by high salaries

Candidates considering Corporate Finance at investment banks should be aware that these positions are extremely competitive and may require Associates to work 80 to 100 hours per week. This busy lifestyle is balanced by high salaries. These jobs tend to be relatively insecure, especially during turbulent economic times.6 While many students aspire to work in this industry when they start business school, far fewer actually end up employed in the field.

Sample Job Titles

These are some of the job titles that are associated with the investment banking field. Please note that these titles can mean different positions or levels at different companies, and that this list is only a sample.

• Corporate Finance Associate
  
• Private Client Services Associate
  
• Credit Risk Management and Advisory Analyst
  
• Asset Management Analyst
  
• Advisory Group Associate
  
• Private Wealth Management Associate
  
• Equity Research Analyst
  
• Securities Trader
  
• Trading Associate
  
• Credit Trading Associate
  
• Sales & Trading Associate
  
• Research Sales Associate
  
• Equities Trade Management Associate
  
• Portfolio Strategy Analyst
  
• Industrial Shares Sales Analyst
  
• Senior Financial Analyst
  
• Finance Manager
  
• Risk Manager
  
• Regulatory Compliance Analyst

Necessary Skills & Experience

Corporate Finance Associates
Candidates from “Top 10” schools have an advantage
Due to the extremely competitive nature of these positions, especially in the large investment banks, it is important that candidates meet certain skill and experience requirements. These requirements should come across in a very strong resume, which is vital to landing a job. It should be noted that most investment banks focus their recruiting efforts on those schools ranked

in the “Top 10.” If not at a “Top 10” school, students need to actively and aggressively seek out these positions. Candidates should know theory and application of finance and accounting It is expected that candidates have a firm grasp on corporate finance and accounting practices. Candidates should be familiar with concepts like discounted cash flow and weighted average cost of capital, and be able to quickly and clearly explain them.7 Candidates not only need to know the theories, but understand how they apply to real investment banking issues. They also need to crunch numbers in a short period of time, and should have a working knowledge of Bloomberg. Hiring managers also expect candidates to have an impressive GPA (exceeding 3.5).
Ambition, knowledge, confidence are key assets to candidates Industry executives are looking for ambitious and confident candidates who can clearly communicate their opinions. Strong analytic skills are vital. Candidates need to learn quickly and demonstrate that they are willing to work long hours.8 Just as importantly, candidates need to immerse themselves in the industry, be up to date on the market, and express why they want to work in the field.

Candidates with investment banking experience have significant advantage in hiring It appears that some experience in investment banking provides a huge advantage in getting hired. At the very least, an internship is nearly a prerequisite for getting Corporate Finance positions in the larger investment banks (this may be less clear in boutique firms).

Other Positions
Sales and trading positions require interpersonal, communication, and negotiation skills While still needing analytical skills, the focus tends to be more on interpersonal skills for sales and trading positions. Candidates need to be especially strong at managing and building new relationships. Communication skills are essential, as are negotiation skills. Traders need to be especially strong at acting and thinking quickly, funneling information rapidly, and dealing well in chaotic circumstances. Some banks are more interested in selling skills than in education and experience.9 Research Analysts need quantitative skills and understanding of operations Research analysts need strong quantitative and economic research skills. They need to understand how companies operate and why they may be successful.

Applicant Differentiation

Visiting companies and interning show determination to succeed

1. Faficy, Mariam, The Fast Track: The Insider’s Guide to Winning Jobs in Management Consulting, Investment Banking and Securities Trading (New York: Broadway Books, 1997) 61.
   
2. http://www.vault.com/nr/newsmain.jsp?nr_page=3&ch_id=240&article_id=16012633
   
3. Naficy, Mariam, The Fast Track: The Insider’s Guide to Winning Jobs in Management Consulting, Investment Banking and Securities Trading (New York: Broadway Books, 1997) 80.
   
4. The Wetfeet Insider Guide to Industries and Careers for MBA (San Francisco: Wetfeet, Inc., 2003) 95. Copyright 2005 by the President and Board of Trustees of Boston University. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means without permission.
   
5. http://www.vault.com/nr/newsmain.jsp?nr_page=3&ch_id=240&article_id=16012633
   
6. http://www.wetfeet.com/asp/careerprofiles_lite.asp?careerpk=20
   
7. http://www.careers-in-finance.com/ibassoc.htm
   
8. http://www.careers-in-finance.com/ibassoc.htm> Copyright 2005 by the President and Board of Trustees of Boston University. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means without permission.
   
9. The Wetfeet Insider Guide to Industries and Careers for MBA (San Francisco: Wetfeet, Inc., 2003) 95-96.

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Private Equity

Private equities are equity securities of unlisted companies. Private equities are generally illiquid and thought of as a long-term investment. Private equity investments are not subject to the same high level of government regulation as stock offerings to the general public. Private equity is also far less liquid than publicly traded stock.
*http://www.fundingpost.com/glossary/private-equity.asp?refer=

“Private equity is an asset class that allows for companies that are underperforming, or undermanaged, or not part of the core strategy of the owner to be put through a transition that allows us to improve their future, value, utility, and the products and services they offer. Private equity is like the body shop of the capital markets. Then, once you've fixed it, you need to ask, where's the vigorish?

Is private equity the right investor? It's more than just money that a private-equity firm can bring. It brings expertise. Business runs on trust, and when you can understand the strategy of a company and you believe management can execute sufficiently against that strategy, that's a powerful incentive to invest. Here again, the power of private equity is that occasionally management teams can get lost in a bigger organization.

Another key element for private equity is the alignment of incentives. We don't make money unless the company makes money and our investors make money. It's all aligned. In a public company, the stock might go up or down but not necessarily based on your actions. That's one of the incentives for management teams to go private. In the private world, reality is where we work, rather than perception. Public perception can add or take away value overnight. Like in the dot-com world. But not in the private world. Your range of movement in dealing with the business issues of a company in the private world is much broader. You don't have to worry about perception, just reality.”
-Dan D’Aniello Co-Founder Carlyle Group with more than $46 billion under management

This article can be found at: http://biz.yahoo.com/usnews/061127/061122_22daniello.html?.v=1

Hedge Funds

Hedge Fund managers actively manage investment portfolios with a goal of absolute returns regardless of overall market or index movements. Hedge funds, however, conduct their trading strategies with more freedom than a mutual fund, typically avoiding registration with the Securities & Exchange Commission (SEC).

There are two basic reasons for investing in a hedge fund: to seek higher net returns (net of management and performance fees) and/or to seek diversification. Higher returns are hardly guaranteed. Most hedge funds invest in the same securities available to mutual funds and individual investors. You can therefore only reasonably expect higher returns if you select a superior manager or pick a timely strategy. Many experts argue that selecting a talented manager is the only thing that really matters. This helps to explain why hedge fund strategies are not scalable, meaning bigger is not better. With mutual funds, an investment process can be replicated and taught to new managers, but many hedge funds are built around individual "stars", and genius is difficult to clone. For this reason, some of the better funds are likely to be small.

A timely strategy is also critical. The often cited statistics from CSFB/Tremont in regard to hedge fund performance during the 1990s are revealing. From January 1994 to September 2000 - a raging bull market by any definition - the passive S&P 500 index outperformed every major hedge fund strategy by a whopping 6% in annualized return. But particular strategies performed very differently. For example, dedicated short strategies suffered badly, but market neutral strategies outperformed the S&P 500 index in risk-adjusted terms (i.e. underperformed in annualized return but incurred less than one-fourth the risk). If your market outlook is bullish, you will need a specific reason to expect a hedge fund to beat the index. Conversely, if your outlook is bearish, hedge funds should be an attractive asset class compared to buy-and-hold or long-only mutual funds.

Many institutions invest in hedge funds for the diversification benefits. If you have a portfolio of investments, adding uncorrelated (and positive-returning) assets will reduce total portfolio risk. Hedge funds - because they employ derivatives, short sales or non-equity investments - tend to be uncorrelated with broad stock market indices. But again, correlation varies by strategy. Historical correlation data (e.g. over the 1990s) remains somewhat consistent, and here is a reasonable hierarchy:

H edge fund investors are exposed to multiple risks, and each strategy has its own unique risks. For example, long/short funds are exposed to the short squeeze. The traditional measure of risk is volatility, that is, the annualized standard deviation of returns. Surprisingly, most academic studies demonstrate that hedge funds, on average, are less volatile than the market. For example, over the bull market period we referred to earlier, volatility of the S&P 500 was about 14% while volatility of the aggregated hedge funds was only about 10%. That is, about two-thirds of the time, we might have expected returns to be within 10% of the average return. In risk-adjusted terms, as measured by the Sharpe ratio (unit of excess return per unit of risk), some strategies outperformed the S&P 500 index over the bull market period mentioned earlier.

The problem is that hedge fund returns do not follow the symmetrical return paths implied by traditional volatility. Instead, hedge fund returns tend to be skewed. Specifically, they tend to be negatively skewed, which means they bear the dreaded "fat tails", which are mostly characterized by positive returns but a few cases of extreme losses. For this reason, measures of downside risk can be more useful than volatility or Sharpe ratio. Downside risk measures, such as value at risk (VaR), focus only on the left side of the return distribution curve where losses occur. They answer questions such as, "What are the odds that I lose 15% of the principal in one year?"

Because investing in a single hedge fund requires time-consuming due diligence and concentrates risk, funds of hedge funds have become popular. These are pooled funds that allocate their capital among several hedge funds, usually in the neighborhood of 15 to 25 different hedge funds. Unlike the underlying hedge funds, these vehicles are often registered with the SEC and promoted to individual investors. Sometimes called a "retail" fund of funds, the net worth and income tests may be lower than usual.

The advantages of funds of hedge funds include automatic diversification, monitoring efficiency and selection expertise. Because these funds are invested in a minimum of around eight funds, the failure or underperformance of one hedge fund will not ruin the whole. As the funds of funds are supposed to monitor and conduct due diligence on their holdings, their investors should in theory be exposed only to reputable hedge funds. Finally, these funds of hedge funds are often good at sourcing talented or undiscovered managers who may be "under the radar" of the broader investment community. In fact, the business model of the fund of funds hinges on identifying talented managers and pruning the portfolio of underperforming managers.

This article can be found at: http://www.investopedia.com/articles/03/121003.as