venture capital and credit rating

8/7/2019 Venture capital and credit rating

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VENTURE CAPITAL AND CREDITRATING


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Venture Capital

Venture capital (VC) is financial capital

provided to early-stage, high-potential,

growth start up companies.

It is the money provided by professionals

Important source of equity.


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Venture Capitalist

Finance new and rapidly growing companies

Purchase equity securities

Assist in the development of new products orservices

Add value to the company through activeparticipation

Take higher risks with the expectation ofhigher rewards

Have a long-term orientation


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Investment Proposal Factors

Managemen t

Potential for Capital Gain

Realistic Financial Requirement and

Projections:

Owner's Financial Stake


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Venture Capital in India

Introduced in India in mid 80s

Inauguration of Risk Capital Foundation

There are around thirty venture capital funds,which have garnered over Rs.5000 Crores.

0.1 percent of GDP,


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Methods of Venture Financing

Equity

Conditional Loan

Income Note

Other FinancingMethods


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Stages of venture capital

Pr e seed Stage

Seed Stage

Early Stage / First Stage Second Stage

Third Stage

Bridge /Mezzanine Financing or LaterStage Financing


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Venture capital fund

Venture capitalists are very selective in

deciding what to invest in.

They are only interested in ventures with highgrowth potential.

They invest in companies in different

industries and different countries

In good times, the funds that do succeed mayoffer returns of 300 to 1000% to investors.


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Most venture capital funds have a fixed life of

ten years

The investors have a fixed commitment tothe fund that is "called down

Because a fund may run out of capital prior to

the end of its life.


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Assessing Venture Capital

It is only in the past 12 to 18 months, they

have come into the limelight.

The rejection ratio is very high, about 10 in100 get beyond pre evaluation stage, and 1gets funded.

Venture capital funds are broadly of twokinds - generalists or specialists.

it is important to choose the right venture

capitalist.


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THE MANAGEMENT

Venture capitalists will insist on a professional

team coming in, including a CEO to execute

the idea. Integrity and commitment are attributes

sought for.

The venture capitalist can provide the

strategic vision, but the team executes it.


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THE IDEA

The idea and its potential for

commercialization are critical.Venture funds

look for a scalable model, at a country or aregional level.

For example, it is very easy for Hindustan

Lever to double sales of Liril - a soap without

incremental capex, while Gujarat Ambujaneeds to spend at least Rs4bn before it canincrease sales by 1mn ton.


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The Venture Capital Process

Deal origination

Screening

Due diligence Evaluation Deal structuring

Post-investment activity

Exit


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Industry Life Cycle


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Growth of VC in India


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Credit Rating

Credit rating estimates the credit worthiness

of an individual, corporation, or even a

country

An evaluation of a potential borrower's ability

to repay debt

A poor credit rating indicates a high risk of

defaulting on a loan


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Personal Credit Ratings

ability to pay a loan

interest

amount of credit used saving patterns

spending patterns

debt


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The ratings are expressed in code numbers

which can be easily comprehended by the lay

investors. Credit rating, as exists in India, is done for a

specific security and not for a company as a

whole.

A debt rating is not one time evaluation of

credit risk, which can be regarded as valid for

the entire life of the security.


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Benefits of Credit Rating

Quick investment decision

Independent investment decision

Investor protection Superior information

Basis for proper risk, return and Trade off


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Benefits to rated companies

Sources of additional certification

Increase the investor population

Encourages financial Discipline Merchant bankers job made easy

Foreign collaborations made easy

Benefits the industry as a whole Low cost borrowing

Rating as a marketing tool


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Credit Rating of Debentures

What is Debenture?

A debenture is defines as a certificate of

agreement of loans which is given under thecompanys stamp.

A bond issued by a corporation which is

secured by the integrity of the borrowers.

A long term loan usually repayable at a fixeddate with a fixed rate of interest.


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Process

CRAs appraise the financial health, especially

capacity to honor debt obligation of

companies and even govt. People who invest in the debt instruments;

such as bonds, debentures, commercial

papers, etc of these entities rely on the report

of CRAs and decide to invest.


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Indian Scenario

In India SEBI has recognized only four CRAsnamely:

(1) Credit Rating Information Services Limited(CRISIL),

(2) Investment Information and Credit RatingAgency ofIndia (ICRA),

(3) Credit Analysis and research (CARE),

(4) FITCH

There is one more CRA in India name ONICRA.But it doesnt seem to have official recognition.


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CRISIL

The first credit agency floated on January 1,

1988.

It was jointly started by ICICI and UTIwith anequity capital of 4 crores.

CRISIL is Indias leading rating agency, and is

the fourth largest in the world.

With over 60% share of the Indian Ratingsmarket, CRISIL Ratings is the agency of

choice for issuers and investors.


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venture capital and credit rating

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