Finances

Spot the Difference – Private Equity and Venture Capital

September 15, 2020

 

Tommy Kim provides an article that explains the differences between Private Equity (PE) and Venture Capital (VC).

Private Equity (PE) vs. Venture Capital (VC). You suddenly realize that you are being presented with two similar, yet different types of capital sources. PE and VC investment management businesses offer investors different types of return on capital using unique risk profiles in long-term illiquid assets.

Whether you are interested in this side of the business as entrepreneurs and CEOs seeking capital or as investment managers seeking to expand your investment management franchise, they are two different types of businesses. As you are shopping for capital, here are the similarities and differences between PE and VC investment management and how they add value to our private capital market landscape and the global economy.

You had been confused at one point, not realizing that PE is actually different from VC. As you have met with both PE and VC managers, you now see that the difference is becoming more clear. Both VC and PE firms work with private capital investing in companies, add value over time, and exit investments through private sale or IPOs, public offerings. The biggest differences between PE vs. VC is in investment size and level of risk taken on each investment. In addition, PE and VC are fundamentally different in the number of deals they do and the size of capital they commit to each investment. Furthermore, PE firms seek no bad deals, while VC firms expect some or many to fail and hope that few would become a unicorn, deals that would be valued over a $1 billion.

 

Key areas include:

  • Types of private equity funds
  • Private equity target and blind funds
  • Return multiples sought in PE
  • Working in PE or VC 

 

Read the full article, Private Equity vs. Venture Capital: What is a Better Fit For You?, on Linkedin.

How to Manage Bad Debt and Delinquent Accounts

 

As both people and businesses begin to feel the economic impacts of the Coronavirus, Tobias Baer provides clear steps that can help your business deal with delinquent accounts.

Many of my clients so far have experienced less delinquencies on consumer debt than I had feared. Unfortunately I don’t think that I can claim that this is only because I’ve helped them draw up extraordinarily effective credit policies and scoring systems – instead, this time around delinquencies themselves might be delayed, and lower balances today may be the receding water levels we observe before a tsunami. A welcome side-effect of lockdown measures across the world was that many consumers had a lot less opportunity to spend – discretionary spending has nose-dived by 30-60% in many markets and card portfolios. And those who were robbed of their income sources by Covid-19 often had some buffers (cash and credit lines) that they could draw upon.

 

Advice included in this article:

  • How to segment delinquent accounts
  • Build an economic model
  • Reassign accounts to dedicated team

 

Read the full article, Three Tools You Need to Stem the coming Tsunami of Bad Debt, on LinkedIn.

 

Financial Projections Post COVID-19

 

Martin Nel shares his synthesis on recent events and data that have informed his outlook on how COVID-19 will affect major players in Canadian Retail Banking.

Covid-19: When will it end? What will be the damage to the economy? What will be the impact on the major players in Canadian Retail Banking? 

Looking at the S&P 500 over the last few weeks, it seems that it will all be over soon, with limited economic damage. Let’s call this the mild outcome.

A Reuters poll of 25 economists says the Canadian economy will shrink by 27.5% this quarter. In April the US growth in unemployment equals the total working population of Canada (~20 million people). Per The London Times Britain is on course to suffer its worst recession for 300 years. Economic indicators say this will go on for quite a while and the damage to the economy will be significant. I’ll call this the severe outcome.

Now, the efficient markets hypothesis says that stock prices reflect all available information and is therefore the best possible prediction of the future. There is also a view that stock markets are driven by irrational human psychology, amplified by trading algorithms. Then again, economic data is reported by publications and neutral stories don’t attract eyeballs or win Pulitzer prizes. 

Bottom line: We don’t know which scenario will materialize.  

So, let’s look at both scenarios and the impact on Canadian Retail Banking.

 

Included in this article:

  • De-globalization
  • Delinquencies and losses
  • Home prices

 

Read the full article, Covid-19 and Canadian Retail Banking – Things are not looking too bad for the Dinosaurs, on the NelInc.ca website.

 

Thinking Ahead – Pension Plans

 

David Gross takes a look ahead at the looming concern about pension plans. 

 

Author’s note: This article focuses on defined benefit pension plans in the private sector. To learn more about the pension challenges facing municipalities and states, check out this article by Mary Williams Walsh at The New York Times and the Federal Reserve’s analysis from December 2019. 

Stock markets plummet by 20 to 30 percent. Long-term interest rates drop. Future economic growth and asset returns are in doubt. Each of these scenarios can threaten the solvency of defined benefit pension plans and pose challenges for the employers sponsoring and managing these plans. Like the Great Recession of 2007 to 2009, COVID-19 has delivered all three scenarios overnight. For companies that elected not to de-risk their plans over the past decade, or lacked the financial means to do so,  the next decade will bring higher contributions and less discretionary cash for reinvestment, mergers and acquisitions, dividends, and buybacks. For some companies, the next decade will also make them less attractive, or unattractive, to potential acquirers or bring a reorganization or liquidation. 

 

Read the full article, The Next Crisis? Pension Plans, on the Strategic Value Partners’ website.

 

Comparing Car Insurance Pricing Models in the US vs Brazil

 

Pieter Lekkerkerk describes current alternative pricing models making inroads in car insurance in the US: pay-per-mile and driving-score based pricing. 

 

In the last few decades car insurance premiums have traditionally been set based on o a risk assessment questionnaire (typically covering the car, its usage, the driver and her/his background among others), enriched with data from e.g., credit bureaus and the Department of Motor Vehicles (on e.g. traffic fines). In the wave that saw the disruption of many business models in the past few years two main alternative pricing models have emerged:

  • Pay-per-use: A rate per mile or minute driven, sometimes complemented by a fixed charge (e.g., MetroMile)
  • Driving score-based rates: Tariff is based on the risk implicit in the driving behavior of the driver (speeding, sharp braking etc.)

 

Areas covered in this article include:

  • The relevance of these models in the Brazilian market 
  • The impact of alternative pricing models in the US
  • Key differences between the US and Brazil in claim
  • Winning models for Brazil

Read the full article, Alternative Pricing Models in Car Insurance, on the Mirow and Co. website.