What is Equity Financing?

Equity Financing is an investment in a company that is not listed on a stock exchange and is sometimes call Private equity Investing. The purchase of shares is privately negotiated, and typically you will realise the value at the end of your investment period by:

• Capital gains through a sale to a competitor in the same sector (Trade Sale).
• Capital gains through a merger with a competitor in the same sector (Expansion).
• Sale to another Equity Financing investor.
• Eventual floatation on the stock market – Initial Public Offering (IPO).

Equity Financing opportunities can be found at all stages of the business cycle and can be categorised into three main types of investment:

• Early stage investment (Angel Investors and Seed Capital)
• Expansion (Venture Capital)
• Later stage investment (Equity Capital)

Read more about these Equity Financing categories in the attached fact sheet.

What are the benefits of Equity Financing?

• Equity Financing can provide standalone superior long term return opportunities that are not available through investment in traditional stocks and bonds.
• Equity Financing can provide a certain degree of diversification benefits to a traditional stock and bond portfolio or to an already diversified portfolio consisting of stock, bond and other alternative asset classes such as hedge funds.

What sort of return should you expect?

The relationship between risk and return generally indicates that higher risk investments, such as Equity Financing or Private Equity, may provide a higher return than a listed stock market portfolio. Return statistics also show that a portfolios risk/return profile improves when Equity Financing or Private Equity is added to a traditional stock and bond portfolio.
The value of your investment is usually determined by:

• The skill and experience of the business management team.
• An estimation of future long-term cash flow earnings.
• Receiving a premium for providing capital to an illiquid and risky investment.
• Receiving a premium from unique trading strategies or private information.

However, while Equity Financing vehicles have a net asset value, their value is not determined in a public market but by an internal appraisal of earning potential relative to capital investment.
The graph below shows the historical performance for private investment as well as traditional investments. Over the past 16 years, both Equity Financing Index and Venture Capital Index provided higher average annual returns than those provided by traditional stocks and bonds.
(Asset Performance Graph)

What risks are involved?

As Equity Financing investments are uncertain in nature, they do involve a higher degree of risk. As an investor you will usually take a passive role in the management of risk within your portfolio. Sometimes, for an investor with the right skill set, there may be an opportunity to take an active role in the management of an underlying investment in their portfolio. The type of investments you choose will also determine your exposure to risk.
An active approach to Equity Financing means your investment portfolio will include a direct investment in a limited number of unlisted portfolio companies. Your investment performance could be adversely affected by one, or two, investments within your portfolio. As an active investor you are a direct shareholder. If you have an appropriate set of skills that the investment company needs, there may be an opportunity for you to become actively involved in the running of the company, hold a seat on the board, or provide advice/consultation on larger corporate decisions. This depends on the requirements of the portfolio company.
A passive approach to Equity Financing investment is where you take no active part in running the company, but are likely to invest via a pooled arrangement (“fund”) or become a passive shareholder. Generally the return depends on the selection of the underlying investment companies by the funds management team and the contribution the funds management team can make to growing the value of the underlying investment companies. The fund management team usually seeks the right to participate in the governance and oversight of each company by taking a seat on the board of directors.
Investing in a company experiencing financial or business difficulties (Turnaround Financing) will have even greater risks. In addition, some companies may have capital structures with significant financial leverage, which increases the investments exposure to adverse economic factors such as:

• Rising interest rates
• Downturns in the general economy
• Deterioration within the company’s general operating conditions – this may be within its business sector or its particular industry.

The return of capital and the realisation of gains, if any, from an Equity Financing investment will occur only through various events such as a sale, merger or initial public offering. There is no assurance that there will be cash flow available for distribution throughout the investment period or that you will be able to liquidate any investment on favourable terms if you desire to cash up your investment before it has time to mature. Therefore, CapitalHUB prefers a portfolio approach to help spread out the risks involved in this type of investing.

How can you gain Equity Financing exposure?

• Investing in a Equity Financing or Private Equity Fund (Often closed to non-institutional Investors)
• Investing in Equity Financing or Private Equity Fund of Funds (Often closed to non-institutional Investors)
• Directly investing in private companies (eg. equity partnerships, property syndicates or a purchase of a direct shareholding in an existing business).

Whether investing in funds or a company directly, CapitalHUB prefers a portfolio approach.

Is Equity Financing right for you?

Equity Financing is most suited for investors who:

• Have had or have an interest in business development and innovation.
• Have had or sold a business and would like to still be involved in some way.
• Wish to gain exposure to alternative asset classes or wish to potentially enhance the returns from a diversified investment strategy.
• Have a long-term horizon, don’t require income and have a high tolerance to risk.
• Wish to take an active part in New Zealand Business.
• Wish to support innovative and new business concepts.

Your Next Step

So if you’re interested in investing in non-publicly listed companies or partnerships, from early Angel Investing right through to late-stage Private Equity, all you need to do is let us know your level of interest and we’ll work together to keep you informed.
We’re always seeking and researching new Equity Financing opportunities. Simply complete the attached CapitalHUB private equities opportunity form, indicate your investment preferences and have your financial professional authorise your eligibility status, then complete the form on our webpage or print and email it back to us.
To qualify for “eligible person” status you need to satisfy the requirements of the Securities Act 1978. This allows CapitalHUB clients to be introduced to potential investment opportunities. These opportunities do not have an Investment Statement or registered prospectus containing the information required by the Securities Act when an offer of securities is made to the public. The information provided on the form will allow CapitalHUB* to introduce you to the opportunities we believe you might be interested in, but you should be aware that the information available in respect of these investments may be less than you would receive in an investment statement or registered prospectus that complies with the Securities Act.
Please read the descriptions on the enclosed form, along with the definitions of “eligible person” investor status and complete with the correct assessment of your status. We recommend that you indicate your levels of comfort with this type of investing*. It is important that you seek independent professional advice before completing any investment.

*CapitalHUB is not a promoter of any Equity Financing that may be introduced to CapitalHUB Clients. CapitalHUB may provide professional financial services to an entity, or the directors or shareholders of an entity, that is introduced to Clients of CapitalHUB as an Equity Financing opportunity.