Long Term Financing
Taught by: Dr. Dipender Randhava
Session 1 & 2
Problems that the countries face after liberalization as most of the Asian countries faced financial turmoil after their economies opened up.
If the stock price remains zero or unchanged, means no one is trading for the stocks.
What is the role of the public private partnership?
Incentive compatibility (In mechanism design, a process is said to be incentive compatible if all of the participants fare best when they truthfully reveal any private information asked for by the mechanism . As an illustration, voting systems which create incentives to vote dishonestly lack the property of incentive compatibility. In the absence of dummy bidders or collusion, a second price auction is an example of mechanism that is incentive compatible.)
Has the quality of the research improved with the advent of internet?
One of the reasons that led to the growth of the economies is the opening up of economies.
During the Asian financial crisis, 2 economies were relatively unaffected by the crisis. Why? Bcoz both the economies were very closed economies at that point of time and the capital inflows and outflows from the country were very limited and controlled by the financial institution of the countries.
However, to grow with the same pace as these countries are doing right now, these countries need capital inflows for capital infrastructure development. And therefore, these countries are slowly but cautiously moving towards opening up their economies completely.
Latin America Development:
80s and 90s are referred to as lost decades in the history of Latin America. Per capita income almost stagnated or fell through most of the latin American countries with few exceptions like Chile and Costa Rica.
Concern with India & China growth in Asean - A growing concern in the Asean region is the growth of the countries like China and to some extent India in the manufacturing sector. The Asean countries are too small with very less resources as compared to these countries to compete with India and China on the manufacturing sides and therefore there is a concern so as to how these countries should grow their economies
These countries need to cooperate but the model can’t be like Eurozone just because there are too many disparities between the countries and most of the countries have corrupt governments.
Some major economic developments:
1) Unification of Germany.
2) 1999 – Euro was introduced leading to the currency unification in Europe
Benefits of Opening up of Economies: lowering tariffs, taxes, free floating exchanging rates, deregulating the domestic sectors
To attract foreign investment –
Rational towards closed economy – If you open a newly emerging economy, a few monopolists would take control of the resources and production and all production would be more oriented towards rich – those who can pay for it.
South East Asia followed the policy of economic growth by leveraging on the areas where the economies are competitive like providing easy access to finance.
Question: What if the requirement of the steel in a country is say 100 but the steel producers in the country are able to produce only 72. What will be the impact of this on the economy?
Answer: The quality of the steel would be severely compromised and there would be increasing cost of construction and infrastructure development. This will raise the cost of everything in the economy. Because the imports are restricted as the country imposes massive tarrifs and therefore it would not be viable to import from outside. What is the overall impact – it will constraint the overall growth of the economy.
Demand Supply Model – works only in a free market system and not in controlled markets like Soviet union.
Assumptions in perfectly competitive market:
ü Large number of buyers and sellers in the market (No one influences market)
ü Efficient / Frictionless markets – no transaction costs
ü Perfect competition
ü Free entry-exit
ü Homogeneous Information (Ideally bank should not exist)
No competition in the market
No incentives for being an efficient producer – there are some invisible constraints beyond which an efficient producer can’t grow in a closed economy.
Why South Asian Countries have been able to do well despite low natural resources-
· Because the last dollar or the currency is invested in the highest return yielding sectors in which these countries are competitive in.
· By Reducing Taxes
Businesses like BPO are moving out of India to China and Phillipines – due to lower cost of labour and skilled labour. This is in fact also good for the economy as the companies are moving more towards providing more value added services rather than just servicing the customer.
What roles do banks provide in such perfect economies (Role of Banks)?
Banks do not exist in such economies. If everyone has all the information – what is the risk profile of each manufacturer, the investors can directly invest and there is no need of any intermediary like banks.
What has led to substantial decrease in the spread for long term borrowing from the capital market and banks?
- Credibility of Information flows about the underlying securities.
How did securitization effected the markets in recent past?
What are the 3 areas of investment which have the most significant impact on poverty?
- Roads, infrastructure and power are 3 resources needed for sustained development of any country
Banks have done more damage to the history that any other institution.
What is the most important product that a bank produces? Information
What do they need to generate loans? – Information about the potential borrowers and worth of their projects.
The information that the banks collect is implied in the demand-supply curve.
Effect of budget deficit in long term finance of a country
- It has a direct impact on the cost of funds or the interest rates and its access. The budget deficit is also an issue of instability in the countries – especially in the countries where the currency is not fully convertible. The shape of the yield curve is very steep sloping curve with very high premium being placed on the long term loans and therefore the companies find it difficult to raise capital for investments in long term
The majority of fund flows in the markets is from the debt and not from equities. That is why the governments of the countries are very concerned about developing the bond markets. The yields on the treasury bonds serve as a benchmark for the interest rates in the country.
What makes a country an attractive place for investment – the financial institutions and their efficiency.
China grown faster than Russia
(Why has China grown so much faster than Russia in spite of Russia having much more resources and skilled man power than China?)
ü Because institutions have degraded.
ü Property prices have plummeted
ü Legal rights have been very poorly defined
ü Investment climate is such that one cannot operate without support from bureaucrats
Architecture of the financial systems – the way the bond markets, the bank markets, the capital and the money markets are integrated.
The countries where the death rate is low started developing financial institutions faster as the family stays longer and believe in developing long term businesses in the country.
Countries have imposed early liquidation taxes on the investors to discourage the early withdrawl of funds from the country.
Session 3
Privatization in Europe:
Under privatization only British Airways survived because of high competition which forced BA to be more efficient in planning resources.
Role of Finance in development:
Finance is bad
It can do magnificent things.
It passively follows real sector industries for investments.
Biggest threat to china in today’s scenario is the huge amount of nonperforming loans in the banking industry. One of the main reasons Chinese government doesn’t want to currency to open up is the consequences of that are unknown. It is still a developing economy with a very rudimentary infrastructure in place to understand the creditworthiness of the corporations.
One of the main areas where India has an advantage is in the area of entrepreneurial talent in the country.
Financial Innovations in recent times:
Securitization
High Yield Bonds/Junk Bonds – This facilitated an entire sector of enterprises come up as banks would have not otherwise funded the companies of this segment.
KKR executed a LBO of RJR Nabisco through the issue of High yield bond/junk bond which was taken on its balance sheet.
Raising money in other markets e.g.: ADR, GDR.
Asian Currency crisis, Indonesia was the worst hit in the entire crisis.
Economies that do not have fully convertible currency a banking crisis leads to balance of payments crisis.
In Scandinavian countries when a banking crisis emerged it didn’t have a balance of payments crisis because they had full convertibility of currency.
Major Problems in Financial Markets:
1) Identifying the lemons(Bad buys) (Apple – Good Buy…..as called in US)
2) Moral Hazard
Puzzles of the financial sectors:
1) Stocks are not most imp source of finance for business
2) Issuing mkt securities not primary funding sources for business.
3) Indirect finance is far more imp than direct finance.
4) Banks are most imp source of external finance
5) Financial system is among heavily regulate sector of economy
6) Only large well established firms have access to securities in markets
7) Collateral is prevalent feature of debt contracts
8) Debt contracts are typically extremely complicated legal documents with restrictive covenants
Transactions cost and financial structure: Transaction costs hinder flow of funds to people with productive investment opportunities.
Session 4
IPO’s are generally underpriced. It’s the premium the company is transferring to the new investors for the information gap.
Moral Hazard: Debt Vs Equity
Principal Agent problem
The banking industry is the only sector where the gains are private and the losses are socialised.
Architecture of the financial System:
The financial system comprises of entire institutions of markets that facilitate transfer of funds from savers to the ultimate investors.
Refers to relative strength of banks in capital markets. A bank dominated system is where banks facilitated growth and provided long term finance. E.g. Japan, Germany.
The biggest concern for countries was to keep the money flowing during the recession.
Balance sheet of a bank in order of the liquidity of assets (Cash & Govt Securities (0% risk) > Interbank deposits(20% risk)>Mortgage with housing collateral(50% risk)> Normal Mortgages(100% risk))
In pension funds, liabilities are predictable for fund house
Session 5 & 6
Whenever we think of LTF, two things come into mind: Equity market and Debt market. In 1950-60 most of equity markets were expanded around the world. But not all companies are able penetrate into this market. There were very few investors in the market and raising the fund through these markets was difficult.
Market has lot of risks like meltdown, black Friday etc. So capital markets have constantly done restructuring/reforms including circuit breakers (1986), Big Bang. i.e. deregulate the brokerage which lead to narrowing of bid – ask spread and fall in commission which eventually enhances returns to the investors.
In the past, companies used to fund their long term requirements through Government funding, Financial Institutions, Depository Financial Institutions (DBS, ICICI Bank started as FIs). Now it is bank dominated and market dominated financial systems. Lot of the industrial expansion took place through banking system run by the industry houses. Banks kept lending even during tough times to the industries as lot of banks’ fund is already sunk in the industry. “Too big to fail”. This was highly unstable and lot of scams took place. Fed Reserve and regulations came into existence.
There are agency problems in such lending activities and 8 puzzles which we discussed yesterday (don’t know what is this) answers this problem to certain extent. The agency problem between two debt holders (internal/external) is very small compared to the problems between equity and debt holders. Obvious manifestation is CEO taking excessive risk. Monitoring this can be done by the banks through monitoring of the cash flows. Banks would know the cash flows coming into the company. So Banks become specialized in lending to special sectors.
Capital markets: What makes prices to move in stock market? FIIs play a major role in Stock market (liquidity). They hold less than 4% of market capitalization but they trade more frequently than any other institutions or investment banks or fund houses. Some cautions while relying on capital market financing in emerging economies:
· Country’s progress and growth rate:
o China – highly volatile
o Vietnam – Not a developed market
o Rumania – Markets are completely out of sink with underlying company’s valuation
· Basic Building Blocks of Regulations and disclosures
· Market Efficiency
o What makes market efficient?
§ Liquidity
§ minimize information asymmetry
§ stability (VVIMP) – economic stability or balance between fiscal and monetary policy that leads to low inflation rate,
One most important thing from businessman perspective for long term financing from capital market is ability to plan for the future. i.e. confidence on future cash flows, its only then would the business invest in fixed assets otherwise more speculations would take place in the market place.
Decision on capital structure:
So how do the firms decide on debt or equity financing, other than capital structure?
Pecking order hypothesis - The most reliable fund which the company can use is its own money, the retained earnings. So companies having huge pile of cash as treated to have no ideas for investments. They are very good targets for takeover.
Financing in Asia:
After internal finance comes the debt financing and then equity. Most businesses in Asia tend to be family owned. Initial funding comes through networks, communities because of trust, shared background, information sharing, reduced information gap, easier contract enforcements. As companies move out to the market external regulations start enforcing rules, disclosure requirements etc. So as the business grows, company gets exposed to more and more unknown investors. So in such scenarios, the faith should be on the financial system itself, judicial, commercial and legal systems of the countries.
Also signaling is a factor considered in the decision of financing. Depending on business cycle, choice of instrument, riskiness, cost of borrowing etc.
How will the firms fund during the course of business cycle?
Visa came out with massive IPO.
GM came with IPO in June 2010 after its bankruptcy filing during crisis. IPO Success factors: timing, profitability, business cycle. They had big problem of pension liabilities before subprime. This was a hindrance for their IPO prior to crisis.GM restructured their debt. GM issue was successful because market was starving for new fresh issues at that point of time. SO market had appetite for GM’s IPO.
Session 7
(Yen slumps after S&P cuts Japan rating………News Headlines) Exports of Japan Doubled – Japan having 2nd largest reservoir after China. But then why USD has gone up & Yen has fallen (Because of Flight to safety / Flight to quality – Means US treasury who is very safe for investment). It depends on image of country, and not on trade defecit / surplus of the country
If China goes out of US treasury, what will happen (Similarly Japanese minister announcing in early 90s that they will come out of US treasury in phased manner)
EU is on slow track (except Germany…..like Greece, Portugal & Ireland crisis – PIGS….ability of govt to service debt), China doesn’t have sound financial system though good growth in int market
No offshore market for Singapore currency to avoid huge chances of arbitrage market (as Singapore economy is small).Ringet (Malaysia) in 1997 – Int rate went from 7%-8% to overnight 19%.....hence govt had to stop currency convertibility from immediate effect. – Conclusion – Currency with a small market but solid product (selling in overseas) will be more affected by demand & supply
China doesn’t have to worry as Remenbe / Chinese Yuan is outside the China market as it accounts for a very small % of total Yuan. It is still controlled by Central Chinese bank
How do I protect against inflation in long run – Very difficult…….even govt. has to cater to higher inflation rates even if they have issued bonds when inflation rate was low (Ex – Latin America)
2 IPO stories
· Glen Core (Commodity business) –(Founder Mark R..Swiss) Sold off 60 million USD, now worth 90 million $ in 1990s & they are now weighed in billions today. Now they are going public (Poor household – 70% expenditure on food)
· Garuda Airline (price scaled down from 1150 Rupiah to 750 rupiah; scaled down offloading of shares from 30% to 26%)…….Bad word of mouth from Europe regarding safety issues
Infrastructure Domain (Public private partnership – PPP) – Needs huge LTF
Slides of Venture Capital
Role of Venture Capitalist
ü Providing funds
ü Providing insights to the evolving business strategies
ü Developing alliances and partnerships
ü Providing network access to vital perspective customers
ü Assistance in head hunting for senior positions
ü Sharing vital and relevant information
Example - Face recognition software by Swiss people – Venture Capitalist, Managing partners in Singapore in housing business has good expertise – Venture capitalist were Singaporian/Indian/ Italian/ Spanish etc)
Success rate of IPO – 10% or lower
Factors of production – Land, labor, capital
Stages of funding (Incubator Model – started by Stanford in Silicon Valley)
ü Angel funding
ü Venture capital
ü Private Equity
ü IPO
Black Stone – Private Equity (What is wrong with private equity, why BS failed……BS diversified into many business) PE good for firm who needs additional liquidity. Best outcome in an investment is achieved if borrower and lender have same objective. Problem – Higher return expected by PE player (seeking quick returns) against the wish of promoter (Cutting down on research, slashing production).
Homogenous information does not mean no risk (Same assessment for past & present but different assessment for future)…...hence, banks / angel investor exists (Exit strategy – Go public or sell to someone else)
IPO – Are the funds being used for the purpose they were taken for (Lapses in due diligence)
Criterion for evaluation
More’s law – Prices become half & competing power double in 2-3 years
Creative destruction – New tech replacing old….like automobile
What makes an Investment grade company
Choosing an investment partner
Funding of R&D by government
Ideal Angel Investor
ü Can provide 300K USD to 1 million USD
ü Enterpreneur at heart
ü Participates in seed round (Series A)
ü Function
o Need based identification of product & market segment
o Fund raising strategy
o Fulfilling the core team
o Contacts with VC
o Exit strategy formulation
Characteristic of venture capital investment
ü Equity Investment
ü Substantial equity stake
ü Company 1st philosophy
ü Exit is very important (3-5 years)
ü Early stage, expansion stage, later stage
Venture capital funding round
ü Knowledge of the industry sector
ü Substantial market size
ü Quality of management team
ü Business plan
o Product and marketing space
o Tech and product development roadmap
o Sales ramp up
ü Due diligence
o Consumer, technology, truth
Criterion for evaluation
ü Credentials and track record of the founding team
ü Market potential for the concept or the idea
ü Technology dependence and intensity
ü Sustainable competitive advantage
ü Scalability of business
ü Execution capabilities
ü Risks & mitigation strategies
ü Exit Options
ü Interview ‘ Feel-Good-Factor’
Choosing an investment partner
ü Industry & ‘stage of funding’ focus
ü Global or company specific
ü Clearly defined value addition
ü Referrals from investee Co’s of the VC’s
ü Referrals from financial institution and other VCs
ü Patience
ü Professional conduct of the partners and their knowledge of the industry
ü Patience
Session 8
Blackstone – Biggest private equity firm in the world…..much better than competitors……..just went public before 2007 recession……High cash in hand……..Gone into diversification – investment in property, advisory business, credit business…….Into hedge funds………not correlated holdings……expanded outside country….. Biggest firm in real estate management (In Asia also) …… Diversification made them more resilient to business cycle…………… Good reputation and relationship to grow…….(Focus in how to get out – Waren Buffet – Negative- Going public & short term strategy…….criticism of LBO……very short sighted….)
IPO very profitable before subscription & not so just after IPO (Due to information asymmetry, over-subscription is seen good for the company)
Session 9
What do you remember after hearing someone speak in a seminar?
Clear thought ideas, stuff simplified.
Discussion Questions
Group 5: Long term finance – General
Develop a taxonomy of the sources of long-term finance starting with the distinction between markets and institutions. Give illustrations of how these boundaries have broken down. Has this development eased the challenge of mobilizing long-term finance? How?
· Financial Systems
o Financial Institutions
§ Commercial Banks
§ Insurance Companies
§ Pension Funds
§ Non Bank Financial Intermediaries
§ Unorganized/informal sector (Normally ignored but huge in countries like Bangladesh etc.)
o Financial Markets
§ Debt Markets
· Mezzanine Securities – Between senior debt & equity. Lots of mezzanine debt allows you to convert debt into equity during stress times. For eg: Public Private Partnership set up as an SPV has mezzanine finance
§ Equity Markets
There has been a blurring of boundaries during the last decade or so. This is due to Deregulation & Financial innovations like Securitization, CDO, Derivative securities. However, creating something out of thin air and selling it under a fancy name is not good.
Example: The school district bought bunch of bonds rated AAA and underwritten by Lehman Bros. and when it tanked they didn’t have anything as it had their entire pension etc. The retailer who sold this CDO to them had education from only 3 hours seminar and he convinced the school board to come and invest.
Financial System operates on trust.
Dis-intermediation in banking system is on a rise with the evolution of what is called as shadow banking system. Innovation can completely by pass regulation.
Glass Steagall Act:
The Banking Act of 1933 was a law that established the Federal Deposit Insurance Corporation (FDIC) in the United States and introduced banking reforms, some of which were designed to control speculation.[1] It is most commonly known as the Glass–Steagall Act, after its legislative sponsors, Carter Glass and Henry B. Steagall.
Some provisions of the Act, such as Regulation Q, which allowed the Federal Reserve to regulate interest rates in savings accounts, were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm–Leach–Bliley Act. [2][3]
The repeal of the Glass–Steagall Act of 1933 effectively removed the separation that previously existed between Wall Street investment banks and depository banks and has been blamed by some for exacerbating the damage caused by the collapse of the subprime mortgage market that led to the Financial crisis of 2007–2010.[4]
Salmon Smith Barney – Set up for the rule that cross state boundaries trade is not possible. For eg: between NY & New Jersey.
Salomon Brothers was a bulge bracket, Wall Street investment bank. Founded in 1910 by three brothers (Arthur, Herbert and Percy) along with a clerk named Ben Levy, it remained a partnership until the early 1980s, when it was acquired by the commodity trading firm then known as Phibro Corporation.[2] This proved a "wag the dog" type merger as the parent company became first Phibro-Salomon and then Salomon Inc.[3]. Eventually Salomon (NYSE:SB) was acquired by Travelers Group in 1998, and following the latter's merger with Citicorp that same year, Salomon became part of Citigroup. Although the Salomon name carried on as Salomon Smith Barney, which were the investment banking operations of Citigroup, the name was ultimately abandoned in October 2003 after a series of financial scandals that tarnished the bank's reputation.[4]
Group’s thoughts:
1. Corporates can now easily reach out the debt markets also due to globalization.
What has caused globalization?
· Liberalization/Deregulation (most important)
· Technological changes
2. Availability of offshore finance
3. Banks having proprietary desks wherein they can trade in derivatives. So, a line is blurred between capital markets & Financial Institutions.
4. If you notice increasingly in the banks’ balance sheet, the non interest income/fee based income rising as against interest based income
How has globalization eased Long Term Financing?
1. With the emergence of Euro, the debt markets have integrated in a big way. This was due to bond issuance
2. Equity markets I Europe still has a home bias. Germans & Italians have a preference for home country equities & reason cited is not aware but these days information on anything is available. This is another example of behavioral finance.
3. Cross border access to funds
4. Innovations in Fixed Income Market like variable rate mortgages, ability to re-finance & steady retirement of sinking funds – have lowered the threshold to go into fixed income markets. Also, the liquidity & confidence has increased in these markets.
5. However, big transactions like Microsoft want to offload some of their shares after the exchange closes? Otherwise it could counter their own interest.
Group 4: Risk
As discussed in class, the boundaries between financial institutions and financial markets are becomingly increasingly blurred. This is said to have contributed substantially to the spread and the severity of the subprime crisis. What are the risks that manifested themselves as a result of these linkages? What are the benefits and drawbacks associated with increasing integration within the financial system.
For Group 4 - Why did AIG have to go bust?
Group’s thoughts:
1. CDS played a big part & AIG had too many CDS & MBS. It was a systemic failure.
2. AIG failed because to all the banks whom it had issued CDS to, asked for it at once. Underlying had collapsed.
3. Freddie Mac & Fannie Mac failure impacted hugely
4. 2 main risks which people came to know because of the crisis are Systemic risk & Liquidity risk. Other risks you can measure Credit risk (quantitative analysis), market risks (VaR) and other frameworks but can’t measure these 2 risks.
5. I have no control on most of the things to curb the systemic risk. Systemic risk is not very common unless it is a bad economy like Nigeria
6. World GDP is growing but financial wealth is exponentially increasing. There is a lot of amount in terms of debt markets. CDO’s & CDS’s increasing hence, if anything goes wrong everything will just CRASH.
7. BIS report talks about unknown risks since 2002-03
8. With growth in emerging markets, the bond spread is narrowing
9. One of the cause for these risks is financial illiteracy
10. It’s clearly a regulatory failure. Govt was giving homes to people but at the cost of a huge financial risk.
11. Pressure on exchange rate. Pegging the exchange rate may increase the pressure.
Group 3: Capital Structure Debate
Summarize the debate on capital structure, starting with Modigliani and Miller’s first proposition and taking the debate to the Pecking Order Hypothesis and beyond. How far does theory go in explaining the actual capital structure maintained by firms? Substantiate your response with data from economies.
1. Maximize the value of the firm by minimizing the debt
Assumptions of M&M:
1. Cash flows are homogenous
2. Perfectly competitive market
3. No taxes
4. Investors borrow & lend at risk free rate
5. No agency costs (because of homogenous information)
6. Operating income is unaffected
7. Financing decisions are independent of each other
8. Value of levered = Value of unlevered
9. Tax benefit on basis of debt
Peking Order Hypothesis:
1. There are bankruptcy costs
2. Increase debt increase tax shield
Based on these peking order. First internally finance their projects. Internal financing then debt then equity as cost of equity is much large.
Fallacy is that internally generated fund is funds given to shareholders. As per textbooks you invest only if expected return is greater than WaCC. In practice it’s a multiple of the HURDLE RATE.
3. Interest payments are exempt is not in all countries
4. Small firms will have information asymmetry hence cannot enter for more debt
5. Depends on kind of sector you are in
6. Collateral is required for extra debt hence that will impact the debt taking power
7. Bankruptcy costs is ignored as it is difficult to estimate it as early as when debt is taken
8. Re-financing debt to lower debt. US Govt stopped issuing 30 yr bond in 2001 and started it again in 2006.
Session 10
M&M model is theoretical; Peking Order Hypothesis is based on observations.
Group 7: Equity
Amongst other factors, the cost of equity dissuades many firms from going public. How does the cost of equity vary over different phases of the business cycle? What determines differences in the cost of equity across firms a) within an industry, b) across firms in an economy, and c) across economies?
1. Ke > Kd & markets generally expect very high returns
2. CAPM model – talks about more in market risk rather than firm’s risks. During stress times, investors demand a higher return & hence firms dissuade from going public
3. In a downturn, equity becomes riskier and risk premium increases thereby Ke increases.
4. During the start-up phase, Ke is very high & as the firm moves on, it gets reduced
5. Price to BV is not accounted in CAPM
6. Liquidity problem
7. R^2 will be different for 2 firms
8. The more diversified a business, the lesser the beta (one of the reason)
9. Ke is different bcoz Beta is different
Group 1: Infrastructure Finance: PPP
Public private partnerships evolved into a favored instrument for managing and financing assets in emerging market economies, especially in the infrastructure sector. Describe the financing structure of a specific infrastructure project. What the risks associated with this mode of financing?
Why is PPP needed?
1. For civil services. For eg:- Hospital, Schools, Singapore’s water by Marina Barrage (Malaysia), The Singapore Auxiliary Police (Certis Cisco)
2. PPP is funded by a pvt company and an incentive to them based on BOT model (Built, Operate, Transfer) model.
3. PP is more relevant in emerging economies
4. Local banks are not able to finance it
5. If the govt takes debt then it would lead to a “crowding out” effect
6. Lowers the cost of operation by more than half
7. Roads, power supply & water play a huge role in an economy’s development
8. Bridge-financing
9. Senior debt, mezzanine debt, junior debt
10. Force Majeure – State assumes control
Group 6: VC and angel funds
“There is a wealth of academic research to support the contention that anyone wishing to build a company for the long term will be better off by not utilizing venture capital. As a result savvy entrepreneurs devise startup strategies that allow them to focus on generating cash flow during the first year instead of chasing venture capital. Conversely, naive “entrepreneurial wanna-bees”, such as those we observed in the recent dotcom era, have a philosophy which can be summed up as, “Give me X million dollars or this idea is dead!”
Do you agree with this statement? Why is venture capital coming under scrutiny? Lay out the evidence for both sides of the argument. On balance, whom does the evidence support?
Group 2: Private Equity
Private equity investors, with their focus on the short-run, sometimes pursue strategies that may result in hollowing out of the enterprises in which they have invested. Conversely, some commentators have observed that private equity is a polite term for LBOs. Do you agree with this assertion? How would you defend the role of private equity firms?
Group 8: Bonds
Can development of bond markets facilitate long term infrastructure finance? How? What are the institutional prerequisites for this to be the case? Illustrate your answer with examples.
1. Govt of India bonds like LIC, IDBI, IFCI etc.
2. Specific bonds for infrastructure are also there for tax benefits
3. Japanese bank (JBIC) report on infrastructure bonds – focus Indian companies – IDBI, IFCI
4. General tenure is 10 yrs, may be zero coupon & coupon yielding bonds
5. Bonds become tradable and can be broken into mutual funds or other instruments
6. Target of spending 500 Cr 80CCF tax deductions
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