In 2003, private equity investments in India totaled over one billion U. S. Dollars. Over eighty investors risked their money in over ninety Indian companies. However, private investment worldwide has been on decline for past three years. It’s expected to continue to decline and Indian companies shouldn’t expect to be exempt from this trend. The increasingly popular alternative to traditional investment options is Private Investment in Public Equities (PIPEs).

During 1990s, American Venture Capitalists financed about one private company out of every two thousand five hundred reviewed-business plans. After one trillion-dollar Dot Com Meltdown, odds of a private company receiving money from a Venture Capitalist declined to less than one financing in every ten thousand reviewed-business plans. The American Venture Capitalist’s initial investment package has declined from fifty million dollars to less than one million dollars.

The mutual fund industry mushroomed through boom of ‘90s and mutual funds became a staple for US (and increasingly international) investors. Currently, they hold seven trillion dollars in assets from some ninety one million American public investors. In past two years, a series of scandals have plagued industry. Last year, four hundred and sixty four Mutual Funds were liquidated. Eight hundred and seventy firms were merged into larger and stronger companies. And, there were about fifty percent fewer new Mutual Funds formed. The creation of American Mutual Funds for overseas investment has declined and may eventually disappear.

Hedge Funds manage about six hundred billion dollars. Because their investors are wealthy Americans, they have not been subject to rigorous U.S. Securities and Exchange Commission regulation. Recent Hedge Fund Scandals have created political pressure for Hedge Fund accountability. The regulatory inclination will probably limit scope of Hedge Fund investment and operation in future.

Access to these three traditional sources of business risk capital is likely to continue to contract. Their investment strategies are riskier than PIPEs. And, it’s loss of investor capital that creates scandals. It’s scandals that motivate regulatory investigations. And it’s investigations that create media problems and risk of civil or criminal charges. For fund managers, it’s safer and more profitable to reduce risk.

The American investment community is moving toward PIPEs. That is Private Investment in Public Equities (PIPE). They offer investor liquidity, which reduces risk. PIPEs offer investors and company greater leverage potential, which increases potentially greater profits.

Investment in a private company is difficult to recover. The company must be sold or investors must wait until private company’s profits repay risk capital. In a public company, subject to regulatory requirements, investors can quickly sell their shares and hopefully recover their risk capital and even make a profit on a bad investment. Public company stock is a guarantee against complete loss of a risk capital investment. As in Venture Capital Models, investors need not assume a percentage of loses in their profit calculations.

The Market Capitalization (issued shares multiplied by company’s share price) is usually a multiple of balance sheet value of most public companies. The greater value of shares means that investor leverages his investment by taking stock for his money. Equally, public company can leverage its balance sheet by using its shares to acquire cash-producing assets and building company. The axiom is West in that Stock is Money.

Merchant banks are traditional source of PIPE financing. However, in past three years, major Venture Capitalists and Mutual Funds have entered PIPE Market. Currently, there is more money available for PIPE financing than sound potential investments in U.S. Public companies. U.S. regulatory policy makes PIPE investing outside United States more attractive, less risky and more profitable than doing PIPE financings of U.S. Domestic companies.

Going West in 1850s was American path to business success. It made railroads dominant economic power in America in 19th Century. Going overseas was business success strategy after World War II. It led to US being an economic superpower in 20th Century. In 21st Century, going public is only road for companies that want to grow into multinational corporations and achieve business success.

Risk Capital and Private Placements

For Private Companies, Risk Capital is almost impossible to find. American Venture Capitalists are currently funding only one business plan in every ten thousand that they review.

The odds of a public company arranging a Private Placement are about one in one hundred. The reasons that a public company CFO can raise risk capital in this way are that investors in a public company can sell their shares and thus have liquidity in their investment, liquidity that is lacking in a private company investment. Also, since a public company's share price tends to trade well above its book value, public company investor gets leverage in that shares should be worth more than equity that they represent in public company.

Spending Your Equity

From CFO's (Chief Financial Officers) viewpoint selling discounted shares is a better deal for public company than selling equity in a private company. Investors in a private company will expect at least 50% equity in company for their money. To raise same amount of money, CFO selling publicly traded shares usually gives up much less than ten percent of equity in his public company. Here's an example.

Let's assume that you are CFO of a public company and want to raise one million dollars. The company's share price is ten dollars per share. Your public company has already issued five million shares of stock. You, CFO, arrange a million-dollar Private Placement at a 50% discount to share price (at $5/share). Your public company will issue 200,000 shares of new stock for its million dollar Private Placement. Your company gives up only 4% of its equity for funding. If company were private, million dollar private placement would cost company at least 50% of its equity! This is simple addition and subtraction. These figures cannot lie. Take your company public!

Your Company Shares Are MONEY.

A wise CFO realizes that a public company's shares are money. I will repeat this important point. Your public shares are money. They can be used to buy other cash producing companies.

If shares trade at ten dollars, company is issuing ten-dollar bills and can issue millions of dollars of its currency. While shares won't buy food at Supermarket nor pay your electric bill, they can be used to buy cash-producing assets for your public company. All major corporations do this as a regular activity.

By converting shares into cash producing assets, you are converting a currency with limited exchange potential into a currency issued by some Government. After all, private company you buy is making money in some Government issued currency. Usually, public company has right to convert all currencies it receives into free trading currencies like Euro, US Dollar, etc. Using this strategy, you as CFO can convert a private or public company grossing a million dollars a year into a public company grossing a hundred million dollars a year within a few years. Let me show you how.

CISCO Leads Way

CISCO Systems, a multi-billion dollar international corporation, built itself into a high tech powerhouse by using its shares to acquire private companies. Its formula was 75% shares and 25% cash.