Alessandro MARRAS

Venture Capital 101: A Quick Overview

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Venture Capital 101: A Quick Overview

Alessandro MARRAS

In this article, Alessandro MARRAS (ESSEC Business School, Global Bachelor in Business Administration (GBBA), Exchange Semester, September 2023-December 2023) gives a quick overview of Venture Capital.

What is Venture Capital?

Venture capital (VC) is a specialized form of financing where investors provide funds to startup or early-stage companies with high growth potential. This funding is crucial for startups to develop and expand their business operations. Venture capitalists not only provide financial support but also offer expertise and guidance to help these companies succeed. The goal of venture capital is to generate significant returns by investing in innovative businesses that have the potential to disrupt markets and achieve substantial growth.

VCs have five main functions:

  • They serve as financial intermediaries, channeling capital from investors into promising portfolio companies.
  • Their investments are directed towards private companies, making them illiquid assets.
  • VCs actively participate in the management and oversight of their portfolio companies, embodying active investors.
  • The primary objective of VCs is to maximize financial returns, typically through strategic exits like acquisitions or IPOs.
  • VCs prioritize investments in entrepreneurial ventures with substantial growth potential, aiming to foster internal growth and increase the likelihood of successful exits. These characteristics highlight the dynamic and strategic nature of venture capital investments, contributing to innovation and economic growth.

VCs vs others:

  • VCs differ from angel investors as they function as financial intermediaries rather than investing personal funds directly.
  • Unlike mutual or hedge funds, VCs invest specifically in private companies, placing them within the category of private equity and alternative investments.
  • While all VCs are private equity funds, the inverse isn’t true; not all private equity funds engage in venture capital.
  • VCs set themselves apart from crowdfunding platforms by actively participating in the companies they invest in, providing ongoing monitoring and management support.

How are VCs organized?

Venture capital firms are typically organized as limited partnerships, structured to facilitate investment activities while providing a degree of protection and incentive for both investors and managers. For investors this protection comes in the form of limited liability, meaning their risk of losing money is confined to their investment amount and they are not personally liable for the debts of the business. This allows them to invest in high-risk ventures with a capped downside. For managers the incentive is often structured as carried interest, a share of the profits of the investments, which aligns their financial interests with the success of the firm’s investments. This ensures that managers are motivated to select and nurture companies that will yield high returns, thereby directly linking their compensation to their performance in managing the venture capital firm’s portfolio.

Limited partnerships in venture capital consist of two main categories of partners. Firstly, there are limited partners, who contribute capital to the fund and bear limited liability. These investors can include wealthy individuals, banks, mutual funds, and other institutional investors. Secondly, there is the general partner, responsible for managing the fund’s operations and investments, and who assumes unlimited liability. Figures like Don Valentine, Ben Horowitz, and Peter Thiel are examples of notable general partners in the venture capital industry.

The lifespan of a typical limited partnership in venture capital is around ten years, during which investors’ capital is committed and cannot be withdrawn. General partners receive compensation in the form of a management fee and a share of the profits generated by successful investments, known as carried interest.

Limited partnerships offer tax efficiency, as they are not subject to corporate taxes, with partners instead paying taxes on their share of the profits. Additionally, distributions of securities to partners incur no immediate tax implications, with taxes only due upon the eventual sale of the securities.

This organizational structure provides a framework that incentivizes efficient investment management and aligns the interests of both limited and general partners in achieving successful outcomes.

Benefits of VC

Venture capital offers a range of benefits to both entrepreneurs and investors, fostering innovation, driving economic growth, and facilitating wealth creation. Firstly, venture capital provides crucial funding to startups and early-stage companies that may otherwise struggle to secure financing from traditional sources such as banks or public markets. This injection of capital enables entrepreneurs to pursue ambitious ideas and develop groundbreaking technologies, driving innovation across various industries. Moreover, venture capitalists often bring valuable expertise, networks, and mentorship to the table, helping startups navigate challenges, refine their business strategies, and accelerate their growth trajectory.

Secondly, venture capital plays a pivotal role in job creation and economic development. By supporting high-growth startups, venture capital investments fuel job creation, as these companies expand their operations, hire new talent, and contribute to local economies. Additionally, successful startups can spawn entire ecosystems of suppliers, service providers, and complementary businesses, further stimulating economic activity and driving regional prosperity.

Furthermore, venture capital investment offers attractive returns for investors willing to accept the inherent risks associated with early-stage ventures. While venture capital investments carry a higher risk of failure compared to traditional investments, they also offer the potential for substantial returns on successful exits, such as acquisitions or initial public offerings (IPOs). As a result, venture capital serves as a vital asset class for investors seeking diversification and opportunities for outsized returns in their investment portfolios.

VC Financing Cycle

The Venture Capital Financing Cycle delineates the sequential stages of funding that startups typically undergo, from inception to exit. This cycle starts with the Seed Stage, where initial capital is raised to prove concepts and build prototypes. As the startup matures, it may progress through various rounds of funding—Angel, Series A, Series B, and beyond—each designed to fuel growth, product development, market expansion, and operational scaling. The Bridge stage serves as a critical juncture for preparing more mature startups for substantial future rounds or positioning for exit strategies. The cycle culminates in the Pre-IPO and IPO Preparation stages, where companies ready themselves for public offering or seek acquisition opportunities, marking the exit phase. This framework not only structures the investment landscape but also maps the growth trajectory of startups. The VC financing cycle is emblematic of the symbiotic relationship between investors seeking to maximize returns and startups in need of capital to fuel their growth ambitions, fostering innovation and economic development within the broader ecosystem.

VCs financial performance in 2023

In 2023, the venture capital (VC) market experienced significant shifts, reflecting broader economic challenges and evolving investment trends. The year saw a considerable downturn in VC investments, dropping to the lowest levels in four years, with a year-over-year decrease of 35% from the already declining levels of 2022. The total amount raised by VC-backed startups barely surpassed $140 billion, influenced notably by a few mega-deals in the artificial intelligence (AI) sector. The decline was not just in the amount raised but also in deal volume across nearly all fund classes, reaching the lowest point in a decade. Later-stage investments saw the most significant reduction in dollar volume quarter-over-quarter, while Series A investments showed some resilience with a 9% increase.

The backdrop of economic headwinds, valuation concerns, and an overhang of more than 50,000 existing VC-backed startups created a challenging environment for new investments. VC fund formation also experienced a sharp decline, dropping 62% from the record year in 2022, although there was a slight uptick in the last quarter of the year. This situation has led to increased caution among venture capitalists, with a notable reluctance to engage in mega-round financing. Only 50 mega deals were recorded in the last quarter of 2023, marking the lowest total since 2017.

Despite these challenges, AI continued to garner significant attention and investment, driving many of the largest deals in the U.S. during the last quarter of 2023. This trend suggests that while the overall VC investment has declined, specific sectors, particularly those related to technological innovation and AI, continue to attract substantial interest and funding.

Why should I be interested in this post?

As an ESSEC students interested in finance, this post can be a useful resource due to its relevance in the financial sector. Understanding venture capital offers insights into alternative investments, career opportunities in private equity, and the dynamics of financing innovative startups, enriching your knowledge and potential career paths within the finance industry.

Related posts on the SimTrade blog

   ▶ Louis DETALLE A quick presentation of the Private Equity field…

   ▶ Louis DETALLE A quick review of the Venture Capitalist’s job…

   ▶ Marie POFF Film analysis: The Wolf of Wall Street

Useful resources

Zider B. (1998) How Venture Capital Works Harvard Business Review.

Jeffrey Grabow (29/01/2024) Will venture capital market rebound in 2024 or seek new floor? EY

KPMG Venture Pulse Q4 2023

Deloitte 2024 trends in venture capital

About the author

The article was written in March 2024 by Alessandro MARRAS (ESSEC Business School, Global Bachelor in Business Administration (GBBA), Exchange Semester, September 2023-December 2023).

Top 5 Private Equity firms

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Top 5 Private Equity firms

Alessandro MARRAS

In this article, Alessandro MARRAS (ESSEC Business School, Global Bachelor in Business Administration (GBBA), Exchange Semester, September 2023-December 2023) presents the top 5 Private Equity firms globally.

Introduction

In the dynamic landscape of finance, private equity firms wield significant influence driving innovation, growth, and value creation. These firms are renowned for their strategic investments and operational expertise, generating substantial returns for investors. In this post, we embark on a journey to uncover the top 5 Private Equity firms globally guided by specific metrics that underscore their reputation and success.

Methodology

To define the top 5 global Private Equity firms, we developed a methodology rooted in a detailed selection process and comprehensive data analysis. Given the vast landscape of private equity firms, our first step was to narrow down our focus by seeking rankings from reputable independent research institutes, such as Private Equity International and Forbes. These rankings served as a benchmark, helping us identify firms that consistently garnered recognition for their excellence within the industry.

From these rankings, we selected firms that appeared most frequently in the top 5, ensuring that our pool consisted of widely acknowledged and respected entities. This approach enabled us to narrow down our analysis to a manageable number of firms, facilitating a more in-depth assessment of their performance and standing.

With our selection criteria in place, we turned to publicly listed firms, as their annual reports provide accessible data crucial for our analysis. It is important to understand that being publicly listed means that the private equity firm is listed on stock exchanges, and anyone can buy shares in the company. However, this is a big difference from investing in private equity funds, where the capital raised is used to buy portfolio companies.

From this we obtained the 5 firms to rank:

  • Blackstone Inc.
  • KKR & Co Inc.
  • The Carlyle Group Inc.
  • Apollo Global Management, Inc.
  • TPG Inc.

To rank these firms, we will be guided by essential measurement metrics that illuminate their standing and impact within the industry. Our evaluation method hinges on key indicators, including Assets Under Management (AUM), fundraising totals, and performance metrics such as gross returns. From an investor’s perspective, this comprehensive approach ensures a deep understanding of each firm’s financial health, strategic positioning, and potential for generating future returns, allowing for informed decision-making in investment opportunities.

Let’s have a more in depth look at the metrics (criterion) used:

Fundraising Totals Over the Last 5 Years. This metric provides insight into each firm’s ability to attract capital from investors over an extended period, reflecting investor confidence and the firm’s fundraising track record.

Total Private Equity AUM (in 2023). Total AUM for the private equity segment in 2023 serves as a measure of the firm’s scale and market presence within the private equity industry.

Private Equity Portfolio Returns (gross returns 2023). This metric represents the firm’s performance in generating returns from its investments in corporate private equity, providing a measure of investment effectiveness and value creation.

For each criterion, we will assign ranks to each firm based on their performance relative to others, with 1 being the highest rank and 5 being the lowest. We will then calculate the average score for each company and rank them accordingly. Each criterion weights the same.

Blackstone

Logo of Blackstone.
Logo of Blackstone
Source: the company.

Fundraising Totals: 126bn$

AUM: 304bn$

Gross returns: 12.1%

KKR

Logo of KKR.
Logo of KKR
Source: the company.

Fundraising Totals: 104bn$

AUM: 176bn$

Gross returns: 16%

The Carlyle Group (CG)

Logo of the Carlyle.
Logo of Carlyle
Source: the company.

Fundraising Totals: 70bn$

AUM: 161bn$

Gross returns: 5%

Apollo Global Management.

Logo of Apollo Global Management.
Logo of Apollo
Source: the company.

Fundraising Totals: 23bn$

AUM: 75.9bn$

Gross returns: 10.2%

TPG

Logo of TPG.
Logo of TPG
Source: the company.

Fundraising Totals: 55bn$

AUM: 97.8bn$

Gross returns: 14.1%

Conclusion

Once we consider all these elements, here are the ranks we obtain for each criterion and their average for each firm:

Therefore, our final ranking for the top 5 Private Equity firms globally in 2023 is:

  1. Blackstone
  2. KKR
  3. TPG
  4. The Carlyle Group
  5. Apollo Global Management

Note: Blackstone is ranked first in more criteria/metrics compared to KKR, demonstrating superior performance across multiple dimensions, and affirming its position as the top-performing firm in the final ranking.

Why should I be interested in this post?

As an ESSEC student enrolled in the SimTrade course, delving into the realm of Private Equity could be of great interest to you. This post serves as an insightful exploration into the industry’s key players, offering valuable insights into their distinctive characteristics. It presents an opportunity to deepen your understanding of the sector and potentially discover your future employer among these influential firms.

Related posts on the SimTrade blog

   ▶ Chloé ANIFRANI Top 5 Asset Management firms in Europe

   ▶ Lilian BALLOISDiscovering Private Equity: Behind the Scenes of Fund Strategies

Useful resources

Private Equity International

Forbes Top 10 U.S. Private Equity Firms Of March 2024

TPG Inc.

The Carlyle Group Inc.

KKR & Co Inc.

Apollo Global Management, Inc.

Blackstone Inc.

About the author

The article was written in March 2024 by Alessandro MARRAS (ESSEC Business School, Global Bachelor in Business Administration (GBBA), Exchange Semester, September 2023-December 2023).

My professional experience as a financial and accounting assistant at Professional Services

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My professional experience as a financial and accounting assistant at Professional Services

Alessandro MARRAS

In this article, Alessandro MARRAS (ESSEC Business School, Global Bachelor in Business Administration (GBBA), Exchange Semester, September 2023-December 2023) shares his professional experience as a financial and accounting assistant at Professional Services.

About the company

Professional Services was founded in 1986 by a team of professionals (lawyers, chartered accountants, and labor consultants), with the aim of providing services to businesses in the accounting, labor, administrative, tax, and corporate sectors. The mission is to offer entrepreneurs an integrated package of services capable of stimulating organizational transformations and facilitating the achievement of adequate levels of competitiveness. The target audience addressed by the Group primarily consists of Italian and foreign companies operating in the service sector and tertiary industries in general, as well as industrial, commercial, transportation, etc. With over thirty years of experience in the sector and an average annual group turnover of approximately €2,000,000, Professional Services can guarantee their clients the highest level of professionalism.

Logo of Professional Services.
Logo of Professional Services
Source: Professional Services.

As an assistant, I was part of the financial and accounting advisory department of Professional Services. In this department we were entrusted with critical responsibilities spanning the processing of accounting data and the provision of essential accounting and administrative services. The department served as the backbone of the organization, providing essential support across a spectrum of financial activities. We were responsible for maintaining accurate and up-to-date accounting records, ensuring the integrity of financial information. Moreover, we undertook the crucial task of preparing and analyzing financial statements, offering insights vital for informed decision-making. Additionally, the team managed various accounting and administrative services, including the maintenance of corporate books, providing corporate assistance, and overseeing the intricate landscape of taxation, encompassing value-added tax (VAT), personal income tax, corporate income tax, and regional tax on productive activities.

My internship

I had a 3-month internship at Professional Services as a financial and accounting assistant in 2023.

My missions

Over the course of these three months, my mission was to prepare and analyze the financial statements for our clients. I ensured that these statements were accurate and complied with relevant accounting standards, providing reliable insights for decision-making. This involved meticulously reviewing balance sheets, income statements, and cash flow statements for the given clients and reporting how these statements were in comparison to industry benchmarks. Moreover, I contributed to the maintenance of clients’ accounting records, assisting in the establishment of a comprehensive and organized financial record-keeping system. I did this through a software called Profis which helped by facilitating the compilation of balance sheets and declarations and performing tax simulations. Additionally, I handled various tasks related to invoicing, ensuring accurate processing and organization to facilitate smooth financial transactions for our clients. By fulfilling these responsibilities diligently, I aimed to support our clients in maintaining financial integrity, facilitating informed business decisions, and providing excellent service overall.

Required skills and knowledge

During this internship, I sharpened a combination of soft and hard skills that were indispensable for my position. Soft skills, such as effective communication, were essential. The ability to convey complex financial information clearly and succinctly to colleagues was crucial. Additionally, strong interpersonal skills facilitated collaboration within the team and ensured smooth workflow.

Attention to detail emerged as a critical soft skill, particularly when working with financial data and reports. The ability to meticulously analyze information and identify discrepancies was crucial for maintaining accuracy and reliability. Furthermore, time management skills were invaluable, as I often juggled various tasks and deadlines while prioritizing workload effectively.

On the hard skills front, proficiency in accounting principles and practices was fundamental. This included a thorough understanding of IFRS accounting regulations and principles, coupled with experience in financial statement preparation and analysis. Additionally, familiarity in applications such as a spreadsheet like Excel and an accounting software like Profis was essential. Mastery of Excel allowed me to manipulate and analyze financial data efficiently, while knowhow in Profis facilitated specific accounting operations and analyses required for the firm’s services.

Adaptability was also key, given the dynamic nature of the internship environment. The ability to quickly learn and adapt to new software and procedures ensured that I could contribute effectively to the team’s objectives. Overall, the combination of soft and hard skills enabled me to excel in my internship at Professional Services, providing me with invaluable experience and preparing me for future challenges in the field of finance and accounting.

What I learned

In terms of knowledge, I learned a multitude of valuable lessons that have significantly contributed to my professional growth and development. Firstly, I gained hands-on experience in financial statement preparation and analysis, improving my skills in interpreting financial data and drawing meaningful insights to support decision-making processes. Through my work. An integral part of this experience was learning to meticulously review and reconcile accounts to ensure accuracy in financial reporting. By identifying and correcting discrepancies between the general ledger and subsidiary accounts, I helped maintain the integrity of financial statements. Additionally, I deepened my understanding of IFRS (International Financial Reporting Standards) accounting principles and regulations, which are crucial for ensuring transparency, accountability, and comparability of financial statements. By familiarizing myself with these principles, I was able to assist in preparing financial statements that met regulatory requirements, enhancing the credibility and reliability of our clients’ financial information.

Moreover, working with software applications such as Excel and Profis expanded my technical proficiency, allowing me to efficiently manipulate and analyze financial data. This experience has enhanced my ability to leverage technology to streamline processes and improve productivity in the workplace.

On a broader level, my internship at Professional Services provided me with invaluable exposure to the dynamics of the finance and accounting industry, in the sense that I gained insight into the day-to-day operations of a consultancy firm, including client interactions, and the importance of maintaining accuracy and integrity in financial reporting.

Furthermore, collaborating with colleagues from diverse backgrounds, such as with different experiences, educational backgrounds and different areas of expertise, has improved my communication and teamwork skills, fostering an appreciation for the importance of effective collaboration in achieving organizational goals.

Overall, my internship experience at Professional Services has equipped me with a comprehensive skill set, valuable insights, and a deeper understanding of the finance and accounting profession, laying a strong foundation for my future career aspirations.

Financial concepts related my internship

Financial Statement Analysis

Financial statement analysis involves evaluating a company’s financial performance and position by examining its income statement, balance sheet, and cash flow statement. In my role, I actively participated in the preparation and analysis of financial statements for clients, ensuring accuracy and compliance with accounting standards.

Financial Reporting Standards

Financial reporting standards refer to a set of guidelines and rules established by regulatory bodies or standard-setting organizations to govern the preparation and presentation of financial statements. These standards aim to ensure consistency, transparency, and comparability in financial reporting across different organizations and industries. In my role, I applied financial reporting standards to prepare and review clients’ financial statements and records, ensuring accuracy and transparency in reporting.

Taxation

Taxation includes corporate income tax, applied to business profits, and value-added tax (VAT), imposed on goods and services at each stage of production. Corporate income tax understanding involves knowledge of tax laws, deductions, and applicable rates. Similarly, understanding VAT requires knowledge of registration, taxable transactions, and applicable rates. Even though I was not directly involved, the team was responsible in accounting for VAT and corporate income tax for clients, ensuring compliance with relevant regulations.

Why should I be interested in this post?

An ESSEC student aspiring to pursue a career in finance would find my experience at Professional Services particularly compelling. By sharing my experience as a financial and accounting assistant, I aim to offer fellow ESSEC students a glimpse into the practical application of finance concepts in a professional setting, inspiring and informing their own career aspirations in the field.

Related posts on the SimTrade blog

   ▶ All posts about Professional experiences

   ▶ Louis DETALLE A quick review of the Audit job…

Useful resources

Professional Services

About the author

The article was written in March 2024 by Alessandro MARRAS (ESSEC Business School, Global Bachelor in Business Administration (GBBA), Exchange Semester, September 2023-December 2023).