How does each address the corporate governance problem Angel investing is the

How does each address the corporate governance

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How does each address the corporate governance problem? - Angel investing is the direct private purchase of equity in small companies by wealthy individuals - agents sell unregistered equity to institutional investors and wealthy individuals. Angel investing usually occurs before the business has started operating, so has a higher risk and reward, and the typical investment is small. - Relationship investing: angel investor is investing in own money - Organized private equity: financial intermediary; getting arm’s length money in relationship lending The corporate governance problem is addressed by close relationships with the new company and by extensive screening. Organized private equity is a market in which specialized intermediaries invest in private companies - control by intermediary is a benefit because it brings management skills that the original owners lack. Investment occurs after a company has been established, and has only moderate risk and reward. The typical investment is larger than angel investing. Includes venture capital (investment in startups), expansions, buyouts and buyins, and vulture capital. The corporate governance problem is addressed by the intermediary taking a controlling role in the enterprise, thus ensuring its interests are most important.
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- Angel investors: trying to help business succeed, not necessarily profit themselves - Corporate governance problem: social pressure from close relationship 2. How are private equity partnerships structured to assure investors of a fair return? - Limited: arm’s length investors - General: run the company, have skin in the game Limited partners: partners in a limited partnership that are purely passive investors General partners: partners in a limited partnership that exercise control - select which companies to invest in and monitor and manage those companies Structure: - General partners are required to provide part of the financing themselves - their own money is at risk as well as investors’ - Lifetime of partnership is limited, at the end assets are liquidated and distributed among partners - imposes a deadline for performance and avoid the problem of calculating ongoing performance -> sell everything and see what it’s worth - Reputational interest for general partners (will be doing more of these partnerships) - General partners are paid for performance rather than effort - most compensation is in the form of asset liquidation - General partners are typically members of a management firm that specializes in setting up limited partnerships - ability to find investors depends on past success and reputation Pension funds are the largest category of investors (limited partners) in private equity partnerships; endowments and foundations, bank holding companies, and wealthy individuals are also large funders 3. What is the difference between a private equity fund and a hedge fund?
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