September 2020

INTERNATIONAL LEGAL
LEAGUE

A BEGINNER’S GUIDE TO:

P R I VAT E E Q U I T Y,
V E N T U R E C A P I TA L A N D
INVESTMENT BANKING.

B Y: T H Y N G U Y E N & M A R I YA S P I R I D O N O VA
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About this Guide

Private equity (hereinafter referred to as PE),
venture capital (hereinafter referred to as VC)
and investment banking (hereinafter referred to
as IB) are similar in that they assist the growth
Contents
of corporations and aim to attain a positive Introduction…................................................................ 2
return on investments (ROI) for investors.
What is Private Equity? ................................................ 4

However, despite harbouring similar goals, the What is Venture Capital?............................................... 6

three concepts have fundamental differences What is Investment Banking?........................................ 9

that are often overlooked. This guide aims to
Conclusion ….............................................................. 14
explore the intricacies of private equity,
venture capital and investment banking to Similarities & Differences …....................................... 15
better understand the differences of the three
concepts.

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What is Private Equity?

“Both [VC and Private Equity is made up of financial institutions like venture capital firms and private
equity firms. Both aim to raise capital to invest in companies by pooling investors’ money
PE firms] aim together to form a fund. PE firms tap into their fund to either directly invest in a private
company or engage in a leveraged buyouy of a public company.

to raise capital
to invest in What is a leveraged buyouy? 5. The eventual sale of the company.
The PE would then sell the company
companies by In other words, a leveraged buyout is the
aquisition of another company. When
after the holding period to turn a profit.

private equity firms engage in a leveraged To further illustrate this strategy, we will
pooling investors’ buyouy, they are executing their buy-to-
sell strategy. This strategy can be under-
briefly look at the Hilton Hotel’s buyout.

stood in five parts: In 2007, private equity firm, Blackstone

money together to 1. Acquisition.
Group Inc. aquired Hilton Hotels Corpo-
ration (now known as Hilton Worldwide
PE firms will acquite a company they Holdings Inc.) in a $26 billion all-cash
form a fund.” deem to be underperforming. deal.

2. Delistment. The firm delisted Hilton before initiating

The firm then delists the acquired the restructuring process. This process
ompany from the stock exchange to included:
begin the restructuring process.
• Hiring Christopher J. Nassetta (the
3. Restructuring of said company. previous President and CEO of Host
During this process, PE firms aim to Hotels & Resorts Inc.) as the hotel
increase the acquired company’s chain’s new CEO.
value.
• Paying off Hilton’s debt.
4. Putting the company back onto
the stock market. Hilton became a publicly traded company
After restructuring the company, the again in 2013. Then in 2018, Blackstone
PE firm will put the company back sold their 5% stake in the company.
onto the stock exchange. During this time,
the firm would continue to increase the Alongside with Blackstone, Neuberger
company’s value. This time period Berman Group LLC and Apollo Global
is called the holding period which Management Inc. are some of the well-
typically lasts three to five years. known private equity firms.

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Startups raise VC funding in a series
What is Venture Capital? of rounds. There are 6 main funding
rounds that may be provided:
Venture capital is a form of private equity.
However, the main difference between the
“VC firms invest in
two is the “age of investment”.

VC firms invest in a company during its

a company during
PRE-SEED FUND
its startup stage.
initial stage. They provide money to startups
that they think have a high potential in the
market as they hope to gain a good ROI. This is the money provided by the founders, family members, close friends
and other supporters to start the company.
When investors fund startups, they acquire
They provide money
shares within the company. These shares are
then sold during the initial public offering
(IPO). IPO refers to the process by which
to startups that
they think have a
a private company becomes public through
selling its stocks in a stock market to the SEED FUNDING
public.

Venture capitalists include institutional in-

high potential in the This is the initial funding provided by venture capitalists. It is the early financial
support that is used to fund product development, invest in capital and conduct
vestors, corporations and wealthy individuals market research. The seed investment is generally relatively small. This funding is
(also known as angel investors). market as they hope considered high-risk, since at this stage the company still has to prove itself with-
in the market. In 2011, Snap Inc. (Snapchat), which is an American camera and
social media company, raised $485K from VC firm Lightspeed Venture Partners.

to gain a good ROI.”

Some well-known examples of VC firms
include: Accel Partners, Benchmark Capital
and Matrix Partners.

SERIES A
This is the first significant round of financial investment. It is cash provid-
ed to companies so that they can buy inventory, equipment and hire em-
ployees. In 2016, Nuro (a US robotics company) “raised $92 million in Se-
ries A funding” from 2 VC firms Gaorong Capital and Greylock Partners.

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 Startups raise VC funding in a series
What is Investment
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of rounds. There are 6 main funding

rounds that may be provided:
Banking?
Investment Banking is a specific division of banking that aids individu-
als, organisations and governments with raising capital. Some notable
IB firms include Goldman Sachs, Morgan Stanley and JP Morgan Chase.

SERIES B IB functions can be divided into 3 forms of activities:

This is the second major round of financial support. This funding is available 1. Front office (revenue generating roles)
to companies once they generate some revenue from selling their products. Be- The front office involves client facing roles that generate revenue for the investment
fore providings funds, investors look for signs of growth. Therefore, since the bank.
company had time to prove itself within the market before the Series B invest- 2. Middle office (risk - related roles)
ment, this funding is considered low-risk. In 2013, Snap Inc. raised a further The middle office staff works behind the scenes, primarily in administrative and sup-
$80M from 7 investors, which included the VC firm Lightspeed Venture Partners. port roles. The middle office directly supports the front-office. This division ensures
that the IB is not involved in activities that could potentially be detrimental to its
health as a firm.

3. Back office (support roles)

The back office of an investment bank is also in charge of more administrative work
SERIES C including, but not limited to, IT, human resources, accounting and compliance.

Companies that reach the third round of financial investment have prov-
en to be successful within the market. Usually, these companies look for
further investment to enter a new market, for research and development or to
acquire other companies. Also, Series C funding is utilised by these com-
panies to “boost their valuation” before an IPO, to increase market share or
to acquire competitors. Series C companies are valued at around $118 mil-
lion. Groupon, an online marketplace company, in 2010 raised $135M from
5 investors, which included VC firms New Enterprise Associates and Acce.

SERIES D
Some companies reach the fourth round of financial investment. For example, this
occurs when a company wants to increase their value further before the IPO. Or
if the company faces a ‘down round’, which is when “the company hasn’t hit the
expectations laid out after raising their Series C round”, therefore having a lower
valuation than in the previous round. Groupon raised a further $950 million in the
next round of funding from 10 investors in 2011 before their IPO in the same year.
VC firms Kleiner Perkins and Andreessen Horowitz contributed to the funding.

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“The function of investment
banking can be divided into three
activities.”
__
IB Activities

FRONT OFFICE
(REVENUE GENERATING ROLES) FRONT OFFICE MIDDLE OFFICE
(REVENUE GENERATING ROLES) (RISK RELATED ROLES)
The front office involves client facing roles
that generate revenue for the investment 3. Wealth management The middle office staff works behind the
Professionals within this department advise scenes, primarily in administrative and
bank. The front office consists of the fol-
wealthy individuals on what they should be support roles. The middle office direct-
lowing departments:
investing. This service is divided into dis- ly supports the front-office. This division
cretionary service and advisory service:
1. Sales and trading ensures that the IB is not involved in activ-
Discretionary service involves the special-
Professionals in these roles buy and ists taking on the responsibility to manage ities that could potentially be detrimental
sell asset and financial instruments. the client’s money. The bank decides what to its health as a firm. Some of the middle
Such as shares, bonds and commodi- the client invests on. office departments include:
ties.
Advisory service is when the bank takes 1. Risk management
2. Investment banking on the role of a consultant. The specialists This department works to prevent and mit-
Professionals in these roles work either only advise the client on what to invest. igate any damages and losses. They spot
within corporate finance or capital mar- dangers and come up with the best ways to
kets. Corporate finance specialists provide 4. Private Equity
manage them. They are constantly adapt-
assistance and advice on mergers and ac- Professionals within this department carry
out the same role as professionals within ing to challenges, such as new regulations,
quisitions. Capital markets specialists trade
PE firms. legislation and individual client needs.
assets, such as stocks and bonds.

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“The function of investment
banking can be divided into three
activities.”
__
IB Activities

BACK OFFICE
(SUPPORT ROLES) INVESTMENT BANKING EXAMPLE

The back office of an investment bank is An example to better depict the role of invest-
also in charge of more administrative work ment banks is Nestle’s sell-off of Nestle Skin
including, but not limited to, IT, human Health in 2019.
resources, accounting and compliance.
Nestle decided to sell their skincare unit
1. I.T. (which owned brands like Cetaphil) to EQT
The IT department of an investment bank’s
back office specifically designs and manag- Partners for 10.2 billion Swiss Francs. The
es the computer systems. reason behind this sell-off was due to the slow
sales growth Nestle was facing. Thus, the
2. Human Resources company wanted to cut off any underperform-
Those who specialize in HR will manage ing businesses.
the recruitment, compensation, benefits,
training, and engagement of the employ- During the transaction between Nestle and
ees. EQT Partners, Credit Suisse advised Nestle on
3. Compliance the deal.
The compliance department ensures the
investment bank follows all regulatory and
legal policies.
4. Accounting
The accounting team helps manage the
finances of the bank.

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 SIM
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Similarities Differences
Conclusion
Type of Private Type of Private
Investment Equity Investment Equity
In conclusion, private equity, venture capital The respective funds VC investments are
raised are from limited to start-ups,
well-established and while PE firms can
and investment banking appear to be similar high net-worth inves- invest in any compa-
tors. ny.
since they involve investors providing financial
Venture Venture
support to companies, expecting a good ROI. Capital The companies VC
Capital PE mainly invests in
mature companies.
and PE firms invest
However, as this article demonstrates, there are in will eventually be VC firms invest in
sold or will IPO. 50% of a company,
while PE firms tend
underlying differences that distinguish them to invest in 100% of
a company.
from one another. These differences are sum-
marised in Figures 1 and 2. We will release Both aim to raise IB advises individu-
Investment capital to support and
Investment als and corporations
Part 2 of the article shortly, which will discuss Banking improve individuals
and organisations.
Banking on investments and
transactions, while
PE directly invests in
recent and future trends as well as landmark companies.

cases relating to private equity, venture capital

SIM

and investment banking. Similarities Differences

Type of Investment Type of Investment
Investment Banking Investment Banking

Both VC firms and VC firms directly in-

IB firms raise capital. vest into companies.
IB firms act as inter-
Venture Venture mediaries in financial
Capital Capital transactions.

VC is a funding
service, whilst IB is a
14 fee service. 15
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PART TWO COMING

SOON!
Part Two of this guide will
discuss the recent and
future trends as well as
landmark cases
relating to private
equity, venture capital and
investment banking.

INTERNATIONAL LEGAL
LEAGUE

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