Question

b) Write brief notes about the key features, relevance and there role in the capital markets for the following: I. Private Equity Funds II. Venture Capital Funds III. Exchange Traded Funds

Answer 1

Private Equity Funds -

1. They generally invest in private companies which have high risk and high return.
2. They also go for controlling stakes in publicly traded companies as well.
3. They are mostly strategic long term investors.
4. They acquire stakes in the firms with an intention of turnaround in the companies operations.
5. Once invested, they target management efficiency/change, operational efficiency and financial efficiency for turnarounds.
6. They mostly buy mature companies in need of turnarounds.

Venture Capital Funds -

1. They generally invest in startups and small businesses.
2. They not only provide the financial investment but also technical and managerial expertise to the startup.
3. Capital is relatively at much higher risk as startup idea might completely fail.
4. But returns are also very high if startup is successful as initial investor get the equity in the company at a much cheaper rate.
5. Venture Capitals also help the company raising additional capital from the other sources like banks and strategic investors.
6. Venture capitals are generally focused in specific areas like - Artificial Intelligence, e-marketing etc.

Exchange Traded Funds -

1. Exchange Traded Funds are securities with a given mandate to invest in a specific asset or strategy.
2. For example - Gold ETFs, invest the money only in gold. Index ETFs track movements of an Index like S&P500.
3. They are just like mutual funds investing in a pre-defined set of assets, but they are traded in the market.
4. ETFs management fee or expense ratio is very small as compared to Mutual Funds as they are passive investments investing in a predefined assets or strategy.
5. ETFs are regulated by market regulators of the country like SEC in USA.