ALTERNATIVE INVESTMENTS

ASSIGNMENT
N.SAI YASHWANTH

MBA-C

121823603046

ANSWERS:

1) Venture capital:

Venture capital is a form of private equity and a type of financing that

investors provide to startup companies and small businesses that are believed
to have long-term growth potential. Venture capital generally comes from
well-off investors, investment banks and any other financial institutions.
However, it does not always take a monetary form; it can also be provided in
the form of technical or managerial expertise. Venture capital is typically
allocated to small companies with exceptional growth potential, or to
companies that have grown quickly and appear poised to continue to expand.

Though it can be risky for investors who put up funds, the potential for above-
average returns is an attractive payoff. For new companies or ventures that
have a limited operating history (under two years), venture capital funding is
increasingly becoming a popular – even essential – source for raising capital,
especially if they lack access to capital markets, bank loans or other debt
instruments. The main downside is that the investors usually get equity in the
company, and, thus, a say in company decisions.

Importance of venture capital for growth of startup ecosystem:

Business size almost triples (and not just thanks to the VC investment)

VC investments make startups one to two times more capitalised than they
might otherwise have been. This causes EIF-backed startups to grow about two
times larger than the control group in terms of assets.
Sure, in the first two years after investment this difference can be put down to
the amount of VC capital received — but the discrepancy goes on to extend
beyond the investment amount itself. Why? Increased financing opportunities
(follow-up investments, but also increased use of debt financing), as well as
crucial non-financial added value (managerial, financial, marketing and
administrative advice) brought by the EIF-backed VC investor.

Revenues are almost twice those of non-VC-backed startups…

Startups supported by EIF-backed VC investments generate revenue that is 19

% to 97 % higher than the control group — one year and five years after the
initial investment, respectively.

…and employment levels are also twice as nice

Measured in terms of cost of labour, employment levels for startups backed by

VC are about twice the size of non-VC-backed businesses. This is a strong
indicator that VC financing supported by the EIF spurs employment growth in
startups.

But why is this important?

There aren’t many studies of this breadth on VC-invested startups in Europe.

With the help of Invest Europe, we have been able to pull together data on
more than 11,500 startups supported by venture capital between 2007 and
2014, and isolate about 800 backed by EIF early stage VC over this time period.

Previous studies hitting around 4,500 means that ours has possibly the highest
coverage of the European VC landscape to date.

This study also brings in new ways and tools to study the famously opaque VC
ecosystem (pro tip: never expect a VC investor to give away the secrets of their
trade!). For instance, we are one of the first to use artificial intelligence to scan
through start-up business models and identify promising entrepreneurial ideas.
We also use geospatial data and airline routes to better simulate the way VC
firms invest.

Establishing that VC-backed startups not only grow but, in fact, grow more
than they would otherwise have done, is crucial in keeping this a policy priority
for the European Union. Taking cornerstone investments in VC funds, as the
EIF has been doing for 20 years, translates into vital support to European small
businesses.
Current venture capital scenario in India:

For Beginners, a venture is a business or any other project that has risk
associated with it. Venture capital is a type of private equity financing option
that is invested in high-potential startups and venture capital firms are the
organizations run by venture capitalists who take the risk of investing in
startups that show huge market potential. Venture capital is not only beneficial
for entrepreneurs but even the investors and the economy too benefits hugely
from type of financing.

Now let’s move on to the current scenario of venture capital financing in India.
India is definitely one of the most powerful countries in Asia with a fast-
developing economy owing to the presence of huge talents and people to
boost those talents. Although venture capital financing in India has already
started spreading its roots, the industry is still in its nascent stage.

However, the present stage of the industry in India is a clear indication that
there’s a lot to happen in the VC industry of India. The biggest per-requisite for
the establishment of an active venture capital industry is the presence of wide
varieties of financial instruments to take care of the investors’ high-risk
investments. The easy availability of these instruments reduces the risks and
ensure a greater return for the venture capitalists.

Over the last few years, venture capital financing in India has witnessed a
significant expansion with the entry of large numbers of local and international
venture capital firms. These firms have already raised billions of dollars to
invest in the local start ups. The huge amount of talent, dynamic business
policies and a favorable business environment are together luring the global
investors too to spread their base in India and boost the entrepreneurial
industry.

 
The investors offering venture capital financing in India are mainly targeting
sectors like technology, software, enterprise software, consumer internet,
online retail, healthcare, energy, advertising, real estate, infrastructure, private
equity, etc. With the surge of activity in the VC industry of India, there is
definitely a lot of scope for new start ups; all this while the private equity
capital was solely meant for the growing and established companies and there
was very less scope for the newbie’s to materialize their potential ideas.

But today, the scenario is quite different. Venture capital financing in India is
open to all provided they find a unique business idea with a growing market,
an efficient management team, an innovative business model and home-run
potential. Once they find a start up with all the necessary items that make it
ideal for an investment, the VCs waste no time to back it with an aim to gain
huge profits. The success of Flipkart is no more new story and is largely
because of venture capital that the firm has managed to raise. In less than 7
years, the firm has earned revenue of over $1 billion.

Venture capital financing in India not only comes with capital but also with
guidance and mentor ship and of course, the strong network that is a must for
every business to reach the ultimate point of success. The investors are,
usually, actively involved in the invested company’s managerial affairs and also
keep an eye on where the capital is being invested so as to ensure that
everything goes into profit making both for the company and the VC firm.

The venture capital funds in India are of different varieties; some are backed by
the central government, some by state government, some by public banks, and
some by public sector organizations while some by the overseas venture
capital companies. Depending on the suitability of sector, stage of
development and location, the investors choose their portfolio companies in
India.

 
If you are one of those investors looking to raise venture capital financing in
India, all you need is a unique product or service, a great management team,
an innovative business model, a strong value proposition to gain the
confidence of the investors and a reliable referral. With all these things in the
right place, it won’t be difficult for you to raise venture capital in India.

To make your search for the right investor faster, you can also consider
becoming a member of an intelligent network, like Merger Alpha, that offers a
common platform to entrepreneurs, buyers, sellers, financial and strategic
investors and financial advisers.

2) Hedge funds:

Hedge funds are alternative investments using pooled funds that employ

different strategies to earn active return, or alpha, for their investors. Hedge
funds may be aggressively managed or make use of derivatives and leverage in
both domestic and international markets with the goal of generating
high returns (either in an absolute sense or over a specified market
benchmark). It is important to note that hedge funds are generally only
accessible to accredited investors as they require less SEC regulations than
other funds. One aspect that has set the hedge fund industry apart is the fact
that hedge funds face less regulation than mutual funds and other investment
vehicles.

Types of hedge funds:

Hedge funds hire analysts that have been trained to quickly ascertain the value
of companies in the middle of crisis. These funds then try to acquire shares
which are undervalued whereas selling overvalued companies simultaneously.
Hedge funds usually take both long and short positions since they are not
averse to risk.

Equity Arbitrage

Contrary to being very risky, a significant number of hedge funds employ

equity arbitrage. This means that their strategy revolves around making risk
free bets to earn money. Equities are traded in many forms such as the spot
market, sectoral indices, market indices and derivatives like futures. The hedge
fund’s strategy revolves around finding arbitrage opportunities during the daily
trading of such investments and then placing highly leveraged bets. It is the
leverage that makes this trading dangerous. Most of the time, traders earn
money from such transactions. However, when things go wrong, the loss can
be considerable.

Mortgage Arbitrage

Developed markets like the United States have a highly developed market for
mortgage related securities as well. There are mortgage backed securities and
collateralized debt obligations being sold. Also, over the counter derivative
products are available for these securities. This strategy is similar to equity
arbitrage. The difference being that mortgage products are used instead of
equity products. Once again, different positions are taken in different markets
to capture the price difference. The earnings would be relatively small if not for
the extreme leverage that is utilized. Leverage ratios of 10:1 are pretty
standard in such trades.

Funds of Funds

A different kind of hedge fund is called “fund of funds”. This fund also
accumulates money from investors just like other hedge funds. However, the
operations of this fund are not similar to other hedge funds. This is because
the investing strategy of this fund is passive. This means that these funds
simply give away the money to other hedge funds. Therefore, there is no active
trading but instead periodic and passive monitoring of the performance given
by other funds. Such funds happy the opportunity to diversify their portfolio to
avoid the riskiness inherent in hedge fund positions. The dangers posed by
leverage are somewhat offset by this diversification.

Emerging Markets

Emerging markets are countries with huge upside potential. These countries
are usually advancing rapidly. However, their markets are not developed well
enough. Hedge funds see this low regulation as an opportunity. Since they
have massive amounts of funds at their disposal, hedge funds can literally
move these smaller markets single handedly.

This strategy is being followed by a lot of hedge funds. Markets such as Brazil
and India have witnessed the application of this strategy. Governments in
developed countries have now become aware of the volatility that such funds
can cause. There are therefore many restrictions in place that limit the amount
of investments that such foreign institutional investors can make.

Global Funds

Many big hedge funds such as George Soros’s Quantum Fund as well as the
massive Tiger Fund define themselves as global funds. This means that they do
not take positions on individual companies or even sectors. They view the
world of finance at a very macro level and predict those movements. For
instance, when outsourcing first began many companies started investing
heavily in macro indices of India and China. Similarly prior to the Euro crisis, it
was revealed that many funds had short positions against European nations.
George Soros made this strategy popular when he broke the Bank of England
and propelled hedge fund managers to celebrity status

Selecting a Fund

The usual approach to selecting investments does not work in the hedge fund
scenario. This is because usually past returns are analyzed before making
investment decisions. However, in the case of hedge funds, data relating to
past returns is not available given the short life of such funds. Therefore
investors have to make their choice based on other parameters like the
reputation of the fund manager, the risk control mechanisms of the fund as
well as their investment philosophy.

Selecting a hedge fund is therefore a very challenging task given that there is
virtually no regulation to prevent the fund from being reckless and also there is
no data to support any kind of decision making.