Question

1. How can investors in venture capital increase the return potential of their investments? Discuss whether investors should contribute funds to relatively inexperienced partnerships .

2. Briefly describe the performance of distressed securities in the last 5 years (1 mark).

3. Discuss two factors that may motivate a distressed investor .

4. Discuss two regulatory concerns that may be faced by a distressed investor .

Answer 1

(i) Venture capital is the fund that us collected from the investors to invest in startups and small businesses which have strong potential to grow. These types of investments are highly risky because the investment is usually done in the equity stake of the company and thus have high potential for greater returns. These funds are not accessible for ordinary investors; these are only for high net worth individuals and big organizations which have assets more than $1 million, who can adjust to the losses that can be faced during the time. These funds are different from Hedge funds and Mutual funds as they invest in startup companies having high growth potential.

The Venture capital invests small amounts in variety of growth potential startups with the view that if one startup fails to give desired results, the other will surely succeed. They diversify their investment and earns huge with the high risk involved. They also earn when the portfolio company exits either through IPO or Merger and acquisition. Since the risk involved is very high, the returns earned are also very high. The venture capitals are eaning huge by investing in every sector startup companies. They collect funds from high net worth individuals or from companies who are looking for investments in different sectors, and then they diversify and invest the money collected in number of startups having high growth potential. Since the investment is done in startups or small and medium businesses, this investment is also known as seed investment. The investment is done in large number of startup companies and thus carries a hugh risk associated with them. Along with the risk, they also earn high returns and thus investors earn more.

Since the investment is done is done by the fund manager in the Venture capital, they analyse the companies before investing to determine whether they will be beneficial to invest in or not. The venture capital invests the fund in different startus and small or medium businesses. If one business fails to provide them the returns, other surely will. So, if investment is made in inexperienced partnership, the returns can still be earned.

(ii) Distressed securities are the securities who are facing hard time and are in distress. These companies are either bankrupt or on the verge of bankruptcy. These securities are purchased by the high net worth individuals, big corporations and various finance houses like hedge fund compnaies, mutual fund houses, etc who can handle risks because with them, there is huge risk associated. These securities trade at a very low price than their par value. The rating of these securities is CCC grade with the security rating agencies like S&P, Moody's, etc. In the past few years, the investing in distressed security by the fund houses, private equity, etc. has increased over the years and the returns provided by them is also exceptional.

(iii) The factors that can motivate the distressed investor are:

1. Since the distressed security is traded at discount or below par price, the amount if lost will be less than what they should have paid for the same security.

2. Since the oast few years, the performance of distressed securities have been exceptional and the return to the investors was also very good.

(iv) The regulations available for distressed securities are:

1. If the company, having distressed securities, liquidates, the claim to the shareholder depends on the time period for which that security was hold. If the time period for which the security was hold is low, then the holder will get low share than the amount received by the holder holding the stock for longer time frame.

2. If the current value of the stock is greater than the liquidation value, then the claim value is settled amongst the different shareholders in agreed proportions.