Since the beginning of the economic and financial crisis, the market for venture capital funds (risk capital funds) or private equity has been constantly changing. In recent years, the gradual internationalization of this activity has allowed its openness to all markets, including emerging ones. Despite the liquidity of venture capital, its growth has been very high, currently making it one of the most profitable types of investments. Notwithstanding, the new regulations of creditor banks, which make them less willing to provide financing, requires an adjustment to the business model. Hence, venture capital or private equity transactions are becoming, once again, more complex on a contractual level.
Since most of the companies involved in venture capital or private equity investments — called receiving companies or participating companies — do not go public, this type of business has a high degree of liquidity. Venture capital or private equity includes the purchase and sale of stocks and shares of companies through a process of negotiation in which a large number of issues are addressed: purchase price, payment, special clauses, purchase options for a majority ownership, etc.
Venture capital or private equity is an investment in securities or shares that occurs after a process of negotiation between two parties. On one hand, is the receiving company seeking financing that is difficult to obtain in the market through other more common means because of their particularly high-risk profile. On the other, are investors who rely on the success of the receiving company, since they feel the company has a high growth potential, and invest to promote such growth by integrating into the company’s board of directors or advising on strategic decisions in order to provide added value and allow them to obtain strong gains at the time of the sale of their shares.
There are different ways to sell venture capital (risk capital funds) or private equity, with the main ones being the following:
- Initial public offering (IPO) of the company: Normally, in such cases the venture capital or private equity disposes its shares
- Sales transaction. Venture capital or private equity can be sold to third parties. Buyers may be directors of the company, companies in the same or a different sector, an investment group, a supplier, etc.
- Sale of the share to another private equity fund.
Enrique Méndez & Karl H. Lincke
This article is not considered as legal advice