Securities are a financial instrument used by companies to raise capital.
In the corporate world, there are 3 major types of securities that can be categorically defined. They are differentiated based on their function and mode of operation.
– Equity Securities
– Debt securities
– Derivative securities
With Equity securities, the investors attain ownership in the companies. The most common type of these instruments is the stocks of a company.
With debt securities, the company can borrow from the public to raise its capital. Bond is the most common instrument used as debt security.
Derivative security depends on another underlying instrument and derives its value based on the other instrument. A contract is one of the examples of derivative security.
Another security that does not fit into any of these 3 categories. This is called Hybrid security. A hybrid security is a combination of more than one type of financial instruments. A stock and a bond together is an example of a hybrid security.
Hybrid Securities are often referred to as ‘hybrids’. They can be bought or sold either in the exchange or through a brokerage. A hybrid security is relatively a new concept yet is very popular due to its advantages.
– Hybrid securities provide a high yield since the rate of return is higher than most senior debts.
– They are less volatile because the distribution of market returns is pre-determined and much regular.
– They have a diverse nature. As they are not bound to any specific category of securities, the overall risk involved is diversified, and thus guarantees attractive returns.
– The only disadvantage of hybrid securities is its complexity. It is more complicated than investing in equity or bond security.
There are many different types of hybrid securities. The following are the most widely used.
Each type of hybrid security has a unique risk involved and at the same time also has reward characteristics. Many other new types of hybrid securities are being introduced all the time in an attempt to meet the needs of sophisticated investors.
The investment made by a private individual, with high net worth and business experience for a new business is known as Angel investment. Such an investor is called an Angel Investor. An angel investor directly invests part of their capital in a new and growing unquoted business. Capital funding for a start-up business is usually provided by an angel investor, as an exchange to convertible debt or ownership equity. Start-up businesses need angel investors the most as they might not be supported by many investors in the initial stages.
The Angel investors are not venture-capitalists. They essentially differ in the ownership of the money that they use to invest. Angel investors always use their own money for investment as they are usually affluent. But Venture Capitalists do not invest their own money in companies. Also, they will not be able to accommodate small deals in large numbers.
The importance of angel investors also increases, as the traditional sources such as bank loans are limited keeping in mind the risks involved and other considerable costs. Angel Investors may also be called as angel funders, business angels, informal investors or private investors.
Angel investors could either be an individual investor or the investment can also be made in syndicates. In such cases, one of the angels in the syndicate will take the lead role. Apart from capital funding, angel investors also provide management experiences, required skill sets and many contacts that the entrepreneur would need. Good angel investors are said to provide Smart and Patient Capital.
Angel Investors do play a very important role in the economy of a country. In many countries, angel investors constitute the largest source of external funding for ventures that are newly established. They provide risk capital and greatly contribute to the growth of the economy and the related advances in technology.
Spreading awareness about angel investors’ activities and policies not only increases the likelihood of new ventures to survive but also could have a significant effect on an entrepreneurial economy.
Here are a few points to keep in mind that help persuade an angel investor for a company’s capital funding.
– The growth potential of the company is one of the key factors. If the company promises 5 to 10 times growth, angels are sure to get attracted.
– Have unique ideas and a proven good team to execute those ideas.
– Connect with other entrepreneurs to know what their investors expect and how they got them to invest.
– Being around accelerators is also one of the great ways to attract angel investors.
– Learn more about the angel you want to associate with. They need to invest, the sector they are interested in investing with, etc.
– Have a thorough knowledge of the industry you are serving. Investors would want to have a clear picture of your business plan and strategies to overcome hurdles in the industry.
– Always be realistic. Never overestimate the business’s worth. Let the valuations be based on measurable parameters.
– Prepare a transparent financial statement that includes legal structure, ownership and outstanding debts of the company.
Most of the Angel Investors themselves may be entrepreneurs. They surely will have valuable advice after going through ups and downs of managing their own business. They become investors to give back. Thus angel investment helps and encourages young entrepreneurs and supports them in their path ahead and also contributes to a great extent to the economy of the country they are a part of.
Investment banking is a segment of banking operation which plays an important role in raising the capital of an individual business or for an organization. They help new firms to go public. They also play a role as intermediaries between the investors and security issuers. The main purpose of investment banking is to create capital for companies, governments, and other entities.
They raise capital by selling securities and by underwriting the issuance of new equity shares. These operations are much different from commercial banking, where they focus on deposits and commercial loans.
An Investment bank offers various financial services for their clients. These include trading of derivatives, foreign exchange, fixed income, commodity, etc. They also perform advisory services for mergers and acquisitions. Initial Public offerings are also performed by Investment banks and they trade on securities and issue or sell bonds on behalf of the client. They also perform leveraged finance which involves lending money to firms for the purpose of purchasing assets and settlement of acquisitions. Restructuring is also a part of investment banking which includes improving the structures of the companies to improve efficiency and enable it to maximize profit.
Investment bankers, in addition to handling IPOs, act in various advisory capacities for their clients. They offer advice to corporations on whether they can take the company public or should raise their capital through alternative means. They regularly advise their clients on all aspects of corporate financing.
So, Investment banking has a major role in assisting corporate and government agencies to obtain capital financing. As financial advisors, they help their clients to price capital, and to thoughtfully allocate their resources and also to manage their investments.
Investment banking is truly the most complex financial mechanisms in the world. They serve a variety of purposes for the business entities they deal with.
The following scenario explains how does an investment bank is able to earn money through acquisition advisories that they provide.
Let’s assume a company plans to buy another company. But this company is unsure about the net worth of the company which it wants to buy. Hence they are unable to make correct judgments about the long-term benefits this venture will bring in to them, with respect to revenue, costs, etc.
The role of the Investment banking, in this case, will be to determine the company’s value through due diligence and settle the deal by helping the company that wants to buy with the preparation of necessary documents and also ensuring the deal is done on the appropriate time for maximum benefits. Here, the Investment bank becomes responsible for the business valuations, as the deal will be based on the result of the business valuation done.
In this case, the Investment bank works on the buy side. There could also be some other investment banks that could have been working on the sell side. Thus, the earnings of the concerned investment banks shall depend on the total net worth of the deal made.
This is just one of the examples of the various services provided by Investment banking. They maintain the balance between organizations and make seemingly difficult decisions made possible.
It is a market where funds are raised for companies and governments through debt security trading. This also includes the trade of corporate bonds, government bonds, certificates of deposit, preferred stock, credit default swap, etc.
The working capital finance of a company largely depends on capital markets. The two main forms of debt financing include selling of bonds or obtaining long-term loans from individuals, banks, and other financial institutions.
To raise equity capital, a firm sells a percentage of ownership and does not pay any interest. But to raise debt capital the firm would borrow funds and then will pay the interest on those funds. Though it is similar to a loan or mortgage, when it comes to organizations, they are done at a much larger scale. This is how Debt Capital differs from Equity Capital.
Any company, agency, sovereigns or even a supranational approach the debt capital market team, or the DCM Team for advice pertaining to debt capital raising.
Typically, the role of a junior-level banker of a DCM Team will be to
In Debt capital market the volume is higher and the margin in lower when compared with the equity capital market. This is also because the global credit markets are larger than the global equity markets as the deals happen within a few days compared to the equity market deals which take weeks or even months. This also facilitates a number of deals to happen, making the market very large.
So, investment banks here charge very less compared to other services like IPO, etc. This is compensated with a higher number of deals.
The debt capital market is preferred because debt cost usually is between 4% to 8% compared to the equity cost being 25% or more. Debt is also a safer option as there are other alternatives to rely upon when the company does not perform well.
The structure of Debt capital markets Team depends on the banks along with the nature of services they provide.
Some banks combine Debt capital market with Leveraged Finance.
Some banks divide their team as corporate issuers and government issuers. They may be again divided based on industry verticals.
There will also be a syndicate team, as in equity capital market, that is responsible for order allocation among investors and builds bond offering books.
Thus, while considering the various options available for corporate financing, the debt capital market stands out to be the best in terms of process time and also with its less risk nature.
Corporate governance is simply the way in which a corporation is governed. It is a system by which the companies are directed and controlled. This system makes the Board of Directors responsible for their company’s governance.
The board directors, managers, employees, and shareholders have a strong professional relationship. Corporate governance ensures Transparency, Accountability, and Security which are the basis for the understanding among the stakeholders.
Here, the rights of all stakeholders are recognized by the company and facilitate co-operation from all of them for the company’s development and financial stability.
Good corporate governance maintains investors’ confidence. Hence, capital raising is done efficiently and effectively. It also lowers the capital cost and has a positive impact on the share price. Thus it ensures corporate success and economic growth.
The fundamental objective of corporate governance is that it enhances shareholders’ value and the stakeholders’ interests are protected by performance improvement.
Various other elements that are considered and worked upon in corporate governance include rule of law, responsiveness, orientation towards consensus, Effectiveness, and Efficiency, Equity and Inclusiveness, and Participation, Discipline, Independence, Fairness and Social responsibility.
A company that takes care of these different elements of corporate governance is sure to outperform other companies. They will be able to attract more investors which aids in further growth of the finance of the company.
Corporate governance, through mutual agreements, respects the rights of shareholders and investors that are established by law.
Corporate governance is actually a framework of rules and procedures through which, enterprise decisions are made and the controllers are held accountable for their decisions.
A set of corporate governance principles was developed and endorsed by the ministers of ‘The Organisation of Economic Cooperation and Development’. Accordingly, Corporate governance will promote transparent and efficient market-based valuations and also be consistent with the rule of the law. It will clearly articulate the supervisory, regulatory and enforcement authorities through the division of responsibilities.
The rights of the shareholders will be protected. These include ownership registration, share transfer, timely update of information on the corporation, participation in shareholder meetings, voting, and sharing the profits of the corporation.
It also ensures all shareholders, including minority and foreign shareholders, are treated equally and have effective redress for any violation of their rights. Self-dealing and Insider trading shall not be permitted. It also prohibits the key executives and members of the board to carry out transactions that directly affect the corporation.
The corporate governance framework encourages active co-operation between corporations and stakeholders to create jobs, wealth and financial sustainability.
It also ensures accurate and timely disclosure of all material matters related to the corporation which includes ownership, performance, financial situation, and governance of the company are made available.
The effective monitoring of management by the board, the board’s accountability to the company and shareholders and strategic guidance of the company are all also ensured by the corporate governance framework.
Make sure that your company adheres to all the rules of corporate governance so that everything is legit.
Why do we need a Financial Investment? Because, it ensures all our dreams turn real, be prepared for unexpected expenses and make our future secure. It also controls our spending pattern and makes us decide how and what amount should be spent so there is sufficient money for the future.
Let us consider a home buyer. What would be the investment amount needed to own a house? The question may seem simple. But that depends on various factors. The location, the neighborhood, size of the house, materials used for flooring, the faucets, the builder, the realty agent, the banker and of course the negotiation skills of the buyer with all of them and so on.
Such is the case when estimating the infrastructure investment of a country. The ambition of the country and the potency in following that ambition plays a major role in deciding the proportion of investment of the country. Budget constraints hold an important role in investment desires. This is true whether it is a home buyer or a country.
Infrastructural needs should be the reconciliation of what the society aspires and how much society can afford. We have so far been focusing on the quantity of money spent on infrastructure. It’s time we start to focus on the quality and objectives of our spending. When a developing country plans for new infrastructures, the costs estimated by 2030 per year could be between 2% to 8% of GDP. This also depends on both the quality of services and the quantity and also on the spending efficiency of countries.
There are three scenarios:
In a scenario where the expenditure is low, countries have modest ambitions and high potency. These countries are compelled to pay 2% of GDP each year to generate new capital funding and can satisfy the basic water needs and sanitation facilities and will be able to achieve universal access by the year 2030. They will be able to provide electricity facilities for basic needs only and energy efficiency will be a priority. They will also be able to provide public transport facilities and taxes on fuel could be increased to encourage people to use public transport as much as possible.
In a scenario where expenditures are low, the country’s ambitions are found high and their potency is low. They are required to spend 8% of GDP each year. This helps them safe water to be accessible to all and so is sanitation. Electricity facilities can be increased from the basic needs to a much higher level. Transportation facilities can be improved to meet the needs of the urban dwellers’ use of their own private vehicles.
In a preferred scenario, countries realize that water facilities, sanitation facilities, and electricity are to be provided to all. Focus is also given to greater mobility, food security, protection from floods and decarbonization. They spend about 4.5% of GDP each year on new infrastructure. With this, they will be able to achieve all the above. These countries are also seen spending 2.7% of GDP in addition to infrastructure maintenance. Smart maintenance not only generates savings but also the cost of the total life-cycle is reduced. Transport, water, and sanitation allow up to 50% of savings through this method.
So, it becomes very important to know what the countries are actually spending.
In the year 2011, the expenditure of developing countries on infrastructure capital investment was nearly 4% of GDP. There will also be a considerable difference in this average across regions.
It is important to note that, the estimated amount of 4.5% spending achieves full decarbonization. The investment paths for full decarbonization wouldn’t be at a higher cost than the polluting alternatives. Hence, infrastructure financing figures need not scare you. With informed decisions, infrastructure related, sustainable development can be achieved as it makes the goals possible.
Middle Eastern issuance of debt has increased 53 percent year-on-year to $57.4bn in the first half of 2017, its best start to the year in decades, according to Thomson Reuters.
In its report, the company said the increase marked the best first half since 1980 and came thanks to Saudi Arabia’s $9bn bond issuance in April and Kuwait’s $8bn issuance in March.
The two countries accounted for 21 percent and 18 percent of the activity by value respectively.
However, Thomson Reuters said it did not reflect positively on Middle Eastern banking fees, which were down 15 percent compared to the same period last year to $462.1m.
This was despite an 88 percent increase in debt capital markets underwriting fees to $136.9m, with debt accounting for 30 percent of the overall Middle Eastern investment banking fee pool – “the highest first-half total in the region since our records began in 2000”, according to the firm.
MENA region managing director at Thomson Reuters, Nadim Najjar, said capital market fees increased by 36 percent to $39.7m, with M&A transactions fees accounting for $98.0m – a 20 percent decrease since last year and the lowest H1 total since 2012.
“Syndicated lending fees declined 41 percent year-on-year to $187.6m, a three year low,” Najjar said
Completed M&A advisory fees accounted for 21 percent and equity capital markets underwriting fees 9 percent, he added.
HSBC earned the highest investment banking fees in the Middle East at $29.2 m, or 6.3 percent share of the total.
The value of announced M&A transactions with any Middle Eastern involvement increased by 8 percent to $20.1bn with energy and power deals accounting for 41 percent of the total.
Despite this, the report highlighted that domestic and Inter-Middle Eastern M&A declined by 46 percent and outbound M&A activity declined by 13 percent.
Source – http://gulfbusiness.com/middle-eastern-debt-issuance-53-h1/
For any typical business, access to appropriate funding is a major challenge. Many businesses struggle due to cash flow, lack of access to working capital, or probably due to wrong funding solutions not suited to nature or cash flow profile of the business. Many businesses struggle to grow beyond a threshold due to sub-optimal funding strategy.
Global financial uncertainty continues to cause anxiety amongst issuers and providers of capital. Corporates fear that future funding needs may not be met, while providers of finance worry about their capital positions and are not confident about funding corporates in a fast-changing business environment.
We have seen recently in UAE number of trading business houses “running away” leaving behind a significant amount of bad loans for the banks. Bankers, Financial Institutions and Investors are becoming more and more cautious thereby choking the flow of funds to even genuine business houses.
Broadly speaking, capital needs for a typical business can be categorized into Debt and Equity Capital with each of them having their merits and demerits. I will outline a few guidelines that can help to prepare your business for efficient capital raising (Debt / Equity) and tapping the diversified pool of liquidity:
Audited financial statements are subject to a series of judgment. Bankers, Investors or Analysts rely on Audited Books of Account, along with other due diligence which they generally perform. For those reasons – bankers, financial institutions and Analysts are more and more willing to accept reports from reputed Audit Firms and Advisors only. Bubble, crisis, contraction, and recovery are stages of the business cycle that keep repeating. Capital flow is closely linked to the economic cycle. In stricter market conditions, a robust business model, strong balance sheet, readiness to embrace greater investor scrutiny and accepting higher financing costs might be required. You can certainly achieve your objective with thorough planning and careful execution. Better get this right the first time, it becomes more difficult after one failed attempt. “Timing is Key” – Pitch it carefully. Keep your financial history clean and make it a competitive process by networking with the right set of bankers, financial institutions, and investors.
Be Transparent and Truthful: The financial markets are becoming more and more intelligent to see through any “Smart Accounting” or “Window Dressing”
The role of the SME sector in generating employment cannot be denied in any economy and more so in the UAE where SMEs contribute to about 90% of the total employment. One of the major challenges faced by SMEs is to get funds from banks for their working capital requirements and for capital expenditure. In the UAE, only 4% of the total bank lending is in SME sector. Approximately 77% of SMEs in Dubai have no access to bank lending.
In such a scenario, alternative funding options will remain an integral part of SME’s financial toolset as credit for them remains constrained. An OECD Scoreboard, which assessed access to finance for SMEs in 34 countries, found that though bank lending is still the main source of finance for small businesses, bank lending hasn’t recovered to pre-crisis levels. The OECD report points out that alternative instruments such as crowdfunding and factoring are gaining traction, but warns that high levels of non-performing loans will continue to hamper bank’s willingness to lend to SMEs.
In the UAE, there are few government-backed initiatives to support SMEs, the notable amongst them being the Khalifa Fund and Mohammed Bin Rashid Establishment for SME Development (MBRE). However, most of the aforementioned institutions aim to fund UAE nationals.
In light of SMEs not getting easy access to funds from banks, what are the alternative funding options available for SMEs? I would like to highlight a few alternative funding options for SMEs in UAE.
Factoring can provide a quick and easy alternative funding to business. Factoring companies can fund part of the working capital cycle swiftly. There are several advantages of factoring. Notable ones are:
Factoring is possible for export sales to advance 80% to 90%
However, factoring can only provide part of your working capital needs and the factoring solution is available only when you are dealing with good customers. The cost of financing for factoring can be on the little higher side compared to bank financing due to insurance cost involved and potentially higher cost of capital for such factoring companies.
One of the most popular asset financing products in most of the industrialized world is leasing. Business houses procuring cars, equipment, machinery, IT hardware, healthcare equipment, shipping vessels, etc. may require significant capital to procure such assets. Such assets can better be funded through leasing compared to bank loans. Vendors (who are selling such equipment) can also offer lease financing solutions to their customers by tying up with leasing companies. Some of the key advantages of lease financing are:
No additional collateral required.
In the UAE, other than banks, there are few leasing focused companies providing lease finance solutions directly to customers as well as by tying up with vendors (who are selling such leasable assets). For vendors, tying with a right lease finance company can potentially be a game changer for their business. Vendors selling high-value assets on credit terms can offer different payment options to their customers with the help of such leasing companies, whilst at the same time, significantly reduce their working capital tied up in the receivables.
Crowd – Funding
Crowd-funding can be a cost-effective way for businesses to raise funds and evidence suggests that its popularity is growing among businesses globally. The level of crowd-funding awareness across the globe has increased significantly over recent years. Policy makers and media have significantly contributed to raising this global awareness. This trend will continue into 2016 leading to a significant rise in the number and diversity of crowd-funding sites. In the UAE as well, there are emerging crowd-funding platforms providing an alternative funding solution for the SME sector. Crowdfunding is still a relatively new concept in the UAE and few businesses have obtained finance using it to date. But, as awareness of crowdfunding will grow in the region, it has the potential to become a viable alternative to a bank loan.
Unlike traditional financing methods, where businesses try to raise large amounts of money from a few financial institutions or individuals, in crowdfunding, a business utilizes an online platform to target a larger number of potential funders.
This usually involves creating a profile of your business project on a crowdfunding website, before inviting people to lend, invest or donate money to help make it a reality. Each funder pledges a small proportion of the overall funding, which is then pooled together with other funders until the target amount is reached.
It is not a new idea – in reality, crowdfunding is just an updated version of collective fundraising or a co-operative. However, because it’s based online, crowdfunding provides access to a virtually limitless pool of potential funders, improving access to finance for businesses in a way that simply would not have worked a few years ago.
Finally, Apart from the above options discussed, there are other alternative funds/financing companies providing working capital finance, project-based mezzanine financing, and last mile financing solutions to companies in the region. We have come across a few good businesses who are struggling due to erratic pullout recently by their relationship banks, putting significant pressure on their working capital cycle. There are some clients in niche sectors, not able to find bank funding because such clients are not the focus of banks generally. The alternative available options can potentially help in financing / refinancing efforts. There are alternative financing companies tapping on the opportunity currently being provided by the banking sector in the UAE.
Dubai – MENA Herald:
The National Bank of Ras Al Khaimah (RAKBANK) has partnered with MI CAPITAL, a leading corporate finance and business advisory firm. The partnership will bring specialized services to RAKBANK Business Banking customers through a dedicated channel. Customers will have access to VAT and accounting advisory, VAT compliance tools, in-house accounting and remote accounting services.
Gulf investors will now be able to tap the $88.23 billion (INR6 trillion) affordable housing market following a tie-up between MI CAPITAL, a Dubai-based financial institution dealing in corporate finance, capital restructuring, mergers and acquisitions, and Life Insurance Corporation Housing Finance Ltd. Asset Management Company (LICHFLAMC).
“We are extremely pleased with the consultancy services provided by MI CAPITAL”