“Structured equity” |
There are, these days, a lot of startups that used to be worth $1 billion and are now worth $500 million. Some of them raised money at $1 billion valuations, back in the good times, and now they need to raise money again. It is, for some combination of good and bad reasons, extremely undesirable for a startup that raised money at $1 billion to raise money again at $500 million. Therefore there is a business opportunity for a fund that will:
- Give startups money at a $500 million valuation, but
- Say that it’s at a $1 billion valuation.
This is called “structure,” or “structured equity.” Bloomberg’s Gillian Tan reported Friday:
Philippe Laffont’s Coatue Management raised about $3 billion for a structured equity fund that allows closely held companies to avoid raising money at lower valuations, a person with knowledge of the matter said.
With the market for initial public offerings in a funk and lower risk appetite from large venture capital investors, some startups have sought to raise convertible notes and pursue structured financings instead of accepting a lower valuation through a traditional equity funding round.
It is always satisfying when a fund has a crisp and simple explanation for how it plans to obtain alpha. “In 2024, startups are desperate to be told that they’re still worth as much as they were in 2021, and we can just tell them that, and they’ll pay us for it.”
Investment firms are raising billions of dollars to buy stakes in venture capital-backed technology start-ups, as a long drought in acquisitions and initial public offerings forces early investors to offload their stock at discounts.
The start-up secondary market, where investors and employees buy and sell tens of billions of dollars’ worth of shares in privately held companies, is becoming an increasingly important trading venue, in the absence of traditional ways of cashing out and given a slowdown in start-up funding.
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What do we mean by structured equity? Structured equity is a form of capital that ranks behind debt in order of repayment, but in front of common equity. There are a number of different forms that structured equity can take, but, generally speaking, interest accrues over time but is not charged in cash.
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https://www.northleafcapital.com/news/article-structured-equity-flexible-capital-solution-private-equity-sponsors
This article explores two of the more common forms of structured equity: company-level preferred equity and fund-level preferred equity.
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