With the European economic and monetary union and the introduction of the Euro, a further step in the globalisation of the markets was made. This means more and more growing stress of competition for nearly every company, because trade and entrance barriers have been elimi-nated. On the other side, this also offers more chances for growth and extending the business. Both aspects of course have one in common: capital requirements and especially staying liquid. In critical economic situations it is more than ever important to stay liquid (having enough pos-sibilities to cover the short-term possibilities). That?s the task of financing and planning the finances.
There are two main sources of assessing capital: equity financing and outside or credit capital. It should be a strategic and well calculated decision, what the capital structure of a company should look like. The ?leverage effect? plays an important role in this context. But it is often not easy to create this structure like it is wished. There are many factors which influence the ?price? and the efforts for getting liquidity out of certain capital sources. One big example therefore is the ?Basle 2? decision, which makes it more exertive for companies to gain loans of banks. This can also mean worse conditions of the loans. These circumstances make it inescapable to seek better alternatives ? like for example getting equity.
Not only because of tougher times for gaining credit capital, but also because of the continuous intensification of competition, has equity financing become more and more important. One cause for that is the long-term oriented affiliation of equity capital to the firm. There are nor-mally no ?stressing? dates when it has to be paid back like is the case with loans from a bank.
This elaboration will give a brief overview about the topic of equity financing. The most impor-tant and common possibilities will be presented and evaluated. But we will also have a look at some special forms and more or less unknown facts about this topic.
Table of Contents
1. Introduction
2. General Aspects about Equity Financing
3. Equity financing in context with the legal form
4. Several possibilities in provision of equity
4.1 External Financing
4.1.1 Private Equity
4.1.2 Venture Capital
4.1.3 Going Public
4.1.4 Further Possibilities and Variants
4.1.4.1 Business Angels
4.1.4.2 Trade Sales
4.1.4.3 Industrial Obligations / convertible bonds
4.1.4.4 Tracking Stocks
4.1.4.5 Management Buy Out
4.1.4.6 State Financing
4.2 Internal Financing (Retained Earnings)
4.2.1 Self-Financing
4.2.1.1 Open Self-Financing
4.2.1.2 Financing through Hidden Reserves
4.2.1.3 Financing through accruals
4.2.2 Financing from Depreciation and Amortization
4.2.3 Factoring
5. Valuation of the different Equity Financing Instruments
5.1 External Financing
5.1.1 Private Equity
5.1.2 Venture Capital
5.1.3 Going Public
5.1.4 Further Possibilities and Variants
5.2 Internal Financing
5.2.1 Self-Financing
5.2.2 Financing from Depreciation and Amortization
5.2.3 Factoring
6. Trends and Forecast about getting Equity
Objectives and Topics
The primary objective of this work is to provide a structured overview of diverse equity financing methods available to companies, exploring how capital structure decisions are influenced by economic factors and corporate legal forms. The analysis focuses on evaluating the strategic suitability of different instruments based on a company's stage of maturity.
- External financing mechanisms including Private Equity, Venture Capital, and IPOs.
- Internal financing strategies such as retained earnings and depreciation-based financing.
- The influence of legal structures on access to capital markets and investor relations.
- Specialized financing variants like Business Angels, Tracking Stocks, and Management Buy Outs.
- Strategic considerations in light of economic conditions and regulatory frameworks like Basle II.
Excerpt from the Book
4.1.3 Going Public
Going public, which is equipollent to emitting company shares at a stock market, often means a huge milestone in the development of a company. With this method, the level of “Private Equity” is abandoned. It is a long-lasting and constitutional change of the capital structure which gives the possibility to nearly everybody to become an owner / share-holder of the company (“Public Equity”). This “tool” for getting equity is often used in a late stage of the expansion phase or at the beginning of the maturity phase.
The normal way of going public (also called Initial Public Offer, “IPO”) begins with finding external partners like consultants, accountants, lawyers and representatives of investment banks. Usually the whole procedure is managed as a project with its responsible persons and a certain time frame. At the beginning, a feasibility analysis is inevitable. Besides formal demands like legal obligations, also the market usages and the maturity of the company for an IPO have to be considered. Maturity is depending on management skills, the strategic concept, the efficiency of the organizational structure and the market and innovation potential. Not only these internal factors are relevant for the success of an emission and the amount of the emission receipts, but also the current stock market situation and its future outlook – especially for the segment the company is in.
Summary of Chapters
1. Introduction: Outlines the increasing importance of equity financing due to global competition and tightened credit conditions, such as the Basle II agreement.
2. General Aspects about Equity Financing: Explores the relationship between a company’s maturity and its financing options, emphasizing the nature of equity as long-term capital.
3. Equity financing in context with the legal form: Distinguishes between issuable and non-issuable companies and how legal forms affect access to external capital markets.
4. Several possibilities in provision of equity: Details various external and internal financing methods, ranging from standard Private Equity to specific instruments like Factoring.
5. Valuation of the different Equity Financing Instruments: Evaluates the advantages and disadvantages of previously introduced financing methods regarding costs, control, and risk.
6. Trends and Forecast about getting Equity: Analyzes current challenges in financing and suggests future strategies for companies to adapt to changing capital market conditions.
Keywords
Equity Financing, Private Equity, Venture Capital, Going Public, IPO, Internal Financing, External Financing, Business Angels, Management Buy Out, Factoring, Basle II, Capital Structure, Stocks, Convertible Bonds, Retained Earnings
Frequently Asked Questions
What is the core focus of this publication?
The paper examines the various methods for obtaining equity capital, categorizing them into external and internal financing while highlighting their application in different corporate stages.
Which financing categories are primarily discussed?
The work covers external financing sources, such as Venture Capital and IPOs, as well as internal financing strategies, including retained earnings and utilizing depreciation.
What is the main research question or objective?
The objective is to provide a comprehensive overview and evaluation of equity financing instruments to help companies make informed strategic decisions regarding their capital structure.
What methodology is employed in this research?
The author uses a descriptive and evaluative approach, synthesizing financial literature and business concepts to compare financing instruments against company legal forms and lifecycle stages.
What does the main body address?
The main body details specific financing instruments, assesses their pros and cons, and discusses how the legal form of a company dictates its ability to access these capital sources.
Which keywords characterize this work?
Key terms include Equity Financing, Venture Capital, IPO, Internal Financing, Business Angels, and Capital Structure.
How does the author view the impact of Basle II on corporate financing?
The author suggests that the Basle II agreement makes it more difficult for companies to obtain traditional bank loans, thereby increasing the necessity of seeking alternative equity-based financing.
What specific challenge do "non-issuable" companies face?
They face limited access to capital markets, lower fungibility of shares, and difficulty in evaluating investor risk due to information asymmetries.
Why is "Factoring" classified under internal financing in this paper?
The author argues that factoring relies on the company’s own ability to create sales and generate receivables, rather than being an external capital injection independent of company operations.
- Quote paper
- Thomas Bossert (Author), 2003, Methods of Equity Financing - Methoden der Eigenkapitalfinanzierung, Munich, GRIN Verlag, https://www.grin.com/document/186508
