Companies need funds for many reasons such as expansions into new markets. The trouble with larger organizations and emerging companies is that they need more money than what they can obtain from a bank loan. Effi Enterprises works with companies to secure various means of financing such as venture capital, private equity financing, stocks and bonds or IPO’s. One solution that is offered to raise money for these companies is to issue bonds to the public market. Through offering bonds publically, it means that rather than looking for one huge investor, thousands of investors can lend a small portion of needed capital. A bond is essentially a loan in which the company is the lender. The company which sells a bond is called the issuer. It is sort of like an IOU given to a lender (the investor) by a borrower (the issuer).
There is a little more depth to it than a simple loan because most people do not loan out their money without expecting something in return. This means that the issuer must offer the investor something in exchange for the loan of their money. This comes from interest payments the rate of which is predetermined and they are made according to a schedule. The date which the issuer has to finish paying the borrowed amount is referred to as the maturity date. Bonds are classified as a fixed-income security because the amount that an investor will get in return is fixed as long as the bond is held until it matures.
What is the difference between stocks and bonds?
The difference in bonds and stocks is that bonds are a debt but stocks are equity. An investor can become part owner of a company by purchasing stock, or equity. But when an investor purchases debt, or bonds they become a creditor to the company. There is an advantage of becoming a creditor in that they will have a higher claim on assets than a shareholder will and if there was a failure causing a bankruptcy they would receive their money before the shareholders. The disadvantage is that a bondholder does not own shares of the company and it the company realizes large profits they will still only get their fixed amount in return. This means that owning bonds is less risky than owning stocks but there is also a much lower return.
Why purchase bonds?
It is true that stocks can offer a larger return than bonds, especially for time periods of at least 10 years. But that does not mean that investing in bonds is a bad investment. Bonds can be a good investment if you are unsure of the stock market’s short term volatility.
What types of bonds are available?
There are two basic types of bonds: municipal and corporate. Municipal bonds are also called “munis.” The returns on this type of bond will incur no federal taxes. Oftentimes local governments will also make their bonds tax free for residents which make them a completely tax free investment. These can be a great investment for many individuals. Corporations offer bonds in the say way it issues stocks. Sometimes a corporate bond is as short as a 5 year term, intermediate are 5 to 12 years and long term is anything over 12 years. These have a higher yield, but it also has higher risk involved. They are more likely to default than a government; but they can also be one of the most rewarding of all the fixed income investments. The credit quality of the company is also very important. Companies can also offer convertible bonds which can later be converted to stocks. Or they can offer callable bonds which the company can redeem before maturity.
Efraim Landa is president of Effi Enterprises which assists entrepreneurs and emerging companies create value. The company offers growing companies hands-on executive management and leadership and helps them discover various ways of securing finances. They offer options such as introducing businesses to angel money, marketing strategies and divestures among many other options. Effi Enterprises works with emerging companies to help find the best solution for their particular situation. This may include stock options for employees, future contracts or any number of other strategies. Future contracts, options, and warrants are all common derivatives.
What is a derivative?
A derivative’s value is based on a contract between parties who are agreeing on an underlying financial asset, security or index. Some of the most common underlying instruments are bonds, currencies, market indexes, stocks interest rates and commodities. Some common derivatives are warrants, swaps, options, forward contracts and futures contracts. Basically, a derivative is an instrument which derives its price from another variable or financial asset. A stock option derives its value from that of a stock; and a swap gets its value from the interest rate index. A derivative obtains its value form an underlying asset and the derivative’s price will rise or fall along with the underlying asset’s value. The derivative’s value is based off of the price of the instrument and the payoff will mirror that of the instrument that they are based on.
A derivative is a contract on an underlying asset. There are many different derivatives but options are the most common type. When an owner purchases an options contract they have the right to purchase or sell the asset at a certain price prior to a pre-set date. The most common underlying assets for which contracts are purchase are stocks, commodities, bonds, currencies, market indexes and interest rates.
Basically, a derivative is a contract between a buyer and a seller. Unlike traditional investments, there is a pre-set expiration date. This time is established at the time the contract is purchased. Payoff is typically determined at the expiry most of the time. Occasionally there is no exchange of money when the contract is made.
Some very well established exchanges trade derivatives. The New York stock Exchange, the Chicago Board of Trade and the French CAC are three. Trades such as these are called exchange-traded derivatives which mean that the terms and features are highly standardized. The advantage to these is that they are regulated which is just an extra safeguard for investors.
Other types of derivative instruments like swaps, forwards and other exotic derivatives are traded over-the-counter. These have very flexible terms and a large number of underlying assets and combinations which can be purchased. These types of financial dealers can customize the derivatives for specific clients and their needs.
The largest thing that makes derivatives appealing to businesses is that they allow a certain amount of leverage. This is a financial term which refers to the increase that occurs when a small quantity of money is all that is used to control another item which is of a larger value. An example is a mortgage. A person can gain control of a highly priced piece of property for a smaller amount of money. Derivatives can give this same type of leverage, or multiplication as a mortgage can. An investor can actually control company stock which has a large value by using a small amount of money. An investor has the opportunity to make more money than the company who is reaping the benefit of the investment.
However, if derivatives take a turn for the worse they can be very costly for a business. In 1995, trader Nick Leeson traded derivatives but the trades were not profitable and because of the leverage the losses were so huge for the Barings Bank of England that they ended up in bankruptcy. Warren Buffet, who is a very successful investor, is against using derivatives and he sees them in a very negative light. However, just like any investment there are always risks involved. Derivatives are a form of investing which have been part of business finance for many years and will likely remain an integral part for many years to come.
An entrepreneur usually starts a business because they feel there is a market for their product or service. The unspoken goal is that the company will grow to the point that they need investors; and hopefully at some point there will be able to go public. Emerging companies will usually look to a private equity firm such as Effi Enterprises, which was founded by an expert in entrepreneurship, Efraim Landa.
An investment is typically made by a venture capital firm, an angel investor or a private equity firm. They all have different types of investment strategies but they provide companies working capital so that they can expand, develop new products or restructure the company on a management level. There are several private equity firms in the United States and a few of them have experienced much success in private equity to foster growth in emerging companies. Here are some brief overviews of some of the top private equity firms in the United States.
TPG Capital, L.P.
TPG Capital is not only one of the largest in the US, but in the world. The company was founded in 1992 by founding partners David Bonderman and James Coulter. They have headquarters in Fort Worth, Texas and San Francisco, California. It has stakes in a wide variety of industries including retail, health care, media and technology. The firm specializes in recapitalizations and leveraged buyouts but the company participates in many other investment strategies. They typically hold on to their investments for 5 to 7 years on average and are active in their holdings when needed. TPG has approximately $48 billion in assets. They have stakes in companies such as Neiman Marcus, SunGard Data Systems, Univision, Freescale Semiconductor and Avaya. The company’s affiliate, TPG Growth concentrates on growth equity and middle-market investments.
The Carlyle Group, L.P.
The Carlyle Group is another worldwide private investment firm. The company was founded in 1987 and went public in 2012. They have over 30 offices located around the world; headquarters are in Washington, D.C. They have made nearly 1000 investments since they were established. They participate in venture capital, leveraged finance opportunities, minority equity investments, real estate and management-led buyouts and specialize in industries such as consumer and retail, technology and business, and energy and power. They have also branched out into various other sectors such as health care, aerospace and defense, infrastructure and financial services.
Kohlberg Kravis Roberts & Co.(KKR)
This is possibly one of the most recognized names in finance and private equity. Their fame came from a scandal surrounding one of the most controversial buyouts ever. They participated in a $31 billion buyout/takeover of RJR Nabisco. The story was immortalized in a bestselling book and later a made for TV movie both entitled Barbarians at the Gate. Although KKR is competitive they are slightly behind many as far as size. They were established in 1976 and have participated in nearly 200 transactions which had a total value of nearly $424 billion.
The Blackstone Group L.P.
If you are talking about alternative asset management and private equity firms, it is certain that The Blackstone Group will be one of the primary topics. Their corporate office is located in New York, NY. Blackstone manages several investment strategies which include real estate funds, private equity funds and hedge funds. But the company also provides other types of financial counsel to their corporate clients as well as restructuring and mergers and acquisitions. Among their clientele are pensions both public and corporate, individuals and financial institutions. Co-founder Stephen Schwarzman also serves as Chairman, Alternative Asset Management, President and CEO of the private equity company.
There is no doubt that the world of finance needed an across the board overhaul from the small business to the entrepreneur all the way up to the largest of financial institutions. The Dodd-Frank Wall Street Reform Act was a broad piece of legislation which was created to help form and maintain financial stability. The intent was to create new organizations and rules on the federal level which will offer stricter oversight for most financial companies as well as the products that are sold by them. There are several key factors that are thought to be beneficial for the state of the financial world.
The Wall Street Reform Act created the Consumer Financial Protection Bureau (CFPB) which is responsible for educating consumers by creating documents and financial curriculum and making them available to the general public. The CFPB operates under the Federal Reserve and is able to create and enforce applicable rules for various types of financial transactions that consumers may engage in. This includes things like credit cards, home or car loans, payday loans and bank accounts. The intent is to protect the public from various types of scams while assuring the consumer that they will still receive quality financial services which are available and priced in a fair manner in every community. The CFPB provides constant oversight of various organizations such as mortgage companies, debt collectors and credit unions.
The new educational documents help clear up definitions for consumers. The goal is to clearly define financial topics such as penalties, fees, risks and credit scores. This offers an extra layer of protection for consumers since it is less likely that one who is informed will fall victim to frauds and scams. Consumers will also likely experience some changes to their existing accounts. Many banks have stopped charging overdraft fees and not honor payments made which will overdraw the account. Guidelines for qualifying for loans are more stringent, but when you do qualify for a loan you will be able to afford it. This may put pressure on different types of financial institutions to be more creative in order to make a profit. This will mean some new services for their customers, for an additional fee of course.
Insurance, Securitized Investments and Derivatives
Some of the complex financial products are regulated more uniformly for various risks. Financial and safety organizations are held responsible for risks. This means there is additional reviews conducted by the government to ensure product safety but this should make insurance more available in communities which have been underserved. Since the passing of the Dodd Frank Act, derivatives are treated closer to securities which require full disclosure of any involved risks as well as exchange trading which is centralized. Mortgage-backed securities and other creators of various securitized investments are required to maintain what is termed an equity stake.
New Indicators for the Economy
The government guarantees no bailout and those acquisition industries and traditional mergers must have a growth strategy and are now required to have an exit strategy. This restricts the size as well as the complexity of financial institutions. There are several new evaluation measures in place which prevent financial upheaval in larger companies which of course, has a wide range of economic repercussions.
This is simply a brief overview of the economic benefits that have been realized from the passing of the Dodd Frank Act. In one way it makes consumers be more hands-on with their own finances and for some this means that they now must hire a financial expert. The goal of this legislation was to provide protection for consumers by requiring higher standards of financial institutions. It puts much more information into the hands of consumers and makes financial institutions more accountable for their products and services.
There was a day when any kind of IPO investment in the technological world was all but guaranteed a huge profit. Some investors grabbed up public stock in companies like VA Linux and had some great first day gains. Those who invested and then sold did very well and made investing look like a very easy process. But investors were disappointed in the long run as they watched values plummet.
It is important to realize that there is no investment that is a guaranteed, sure thing. There will always be risks associated with investing. Companies like Effi Enterprises are aware of the risk factors and carefully consider the high tech companies that they offer venture capital or private investing options to. The biggest lesson many investors have learned is that the IPO market leveled out and there are not the same extreme gains to be had simply from flipping stocks. IPO’s have a huge set of very unique risks which makes them different from trading in average stock. A good example right now is the Facebook IPO. Many people grabbed up public shares and invested in the top social networking company. Stocks have risen somewhat from their initial drop but they are still about 13 percent down from where they were a short time ago. That’s not actually a bad drop compared to many companies such as Zeltiq Aesthetics who is sitting on a 65 percent decline from its initial IPO price.
People thought they could buy up some Facebook shares and watch the prices soar immediately. Basically, they took a risk and lost. IPO’s are not the best option for most investors. When a company goes public one of the main risk factors is that there has not been a trading history and so there are no analytical reports to examine. Trying to obtain information on a company that is going public is going to be difficult. Most of the time companies have traded publically and so there are lots of analysts which have done their homework. These reports can at least reveal some of the problems they have encountered.
Purpose of an Underwriter
Many times a company which is going public does not have a strong underwriter. This of course, does not mean that investment banks never produce a dud, but generally quality brokerages will be bringing only quality companies public. It is very risky to choose companies who are represented by smaller brokerages because they are many times willing to underwrite any company at all. A larger investment firm can be more selective about which companies it underwrites than a small underwriter can. However, the smaller broker can make it a lot easier for private investing since it’s much easier to purchase IPO shares.
Read the Prospectus
It is important to read a company’s prospectus. But keep in mind that this is not done by an outside party, it is written from within the company so it is not necessarily as reliable as a third party analysis. You will need to note the risks and opportunities as they are presented by the company. You will want to know why they are going IPO. If the money raised by IPO is going to repay loans or to buy equity from private investing, stay clear. However, if it is going toward marketing, expansions or research it is usually a good sign.
This does not mean that IPOs are all bad. There have been many success stories over the years. There are some very successful companies that go public every single month, however, it can be very difficult to sift through it all and find the investment opportunities with the most potential. Efraim Landa works with companies who are going public to help ensure each party’s success.
Warren Buffett is a household name because of his great wealth. But many of us forget that he amassed this wealth through different forms of private investing and hedge funds. He learned valuable lessons at a young age through investing in the stock market. As he matured he ventured out into various practices in private investing. For many, it seems that having lunch with this very wealthy man would be out of the question. However, each year Warren Buffett sponsors a luncheon that is a fund raiser for his favorite charity.
The GLIDE Foundation
Normally, eating lunch at a higher end steakhouse in Manhattan with nine people would run somewhere around $1000. But this year it cost on investor nearly $3.5 million. That was the final bid on this year’s charity auction in which the winner gets to enjoy lunch with Warren Buffett and the proceeds go to a charity based in San Francisco, the GLIDE Foundation. The charity provides meals, housing and funding for community based clinics. Over the last 13 years the auctions have raised more than $11 million for the group.
The charity auction is conducted online and the winner gets to take seven friends for lunch with Warren Buffett at the Smith & Wollensky steakhouse located in Manhattan. In 2011 a fund manager, Ted Weschler paid $2.63 million to share lunch with Warren Buffett. But after the lunch Weschler was hired by Buffett’s Berskshire Hathaway as an investment manager. He only beat out one other person in last year’s auction in which only 8 bids were offered by just 2 people. Weschler won both the 2010 and 2011 auctions which yielded almost $5.3 million for the charity.
In 2012, there were 10 bidders in all and over 106 bids were made during the 5 days the online auction was open. When it ended, the winner had bid $3,456,789 exactly. This amount will be given to Buffett’s favorite charity and the winner will enjoy lunch with Buffett. Smith & Wollensky also contribute a minimum of $10,000 to the charity to host the lunch.
The goal is not for Warren Buffett to find future employees through the luncheon; it is simply to raise money for his favored charity. While Buffett isn’t looking for new hires through the auction, Weschler did end up getting hired by Buffett last year to help in managing Berkshire’s investment portfolio. Most of the time, the winner of the auction just gets the opportunity to sit and converse with Warren Buffett, known throughout the world as a profitable investor and a leader in entrepreneurship.
Discussions with Warren Buffett
But talk over lunch is not always only about money with this multi-millionaire. Although the big draw for many bidders is Buffett’s amazing business sense and outstanding success in investing, the lunchtime conversation does not center around potential investments. Since Warren Buffett has made such a mark on philanthropy, many past winners have wanted to discuss giving. Since 2006, Buffett has continued to slowly give a portion of his fortune. He wants to eventually divide his Berkshire stock up between five charitable foundations. He intends for the largest portion to go to the Bill & Melinda Gates Foundation.
Warren Buffett and Bill Gates have been trying to encourage extremely wealthy people to give away at least half of the fortunes they have amassed. Almost 80 of the United State’s wealthiest have joined in with this effort.
Auction winners have expressed that the time spent having lunch with the well respected Warren Buffett is well worth the price they have paid. The lunch usually spans several hours and Buffett answers questions as they are posed. Usually, according to Buffett, many of the questions are about non-business topics like family and philanthropy.