1. Chapter 7 Financing a business 2: raising long-term finance
LEARNING OUTCOMES
You should be able to:
Discuss the role and nature of the Stock Exchange
Identify the problems that smaller businesses experience in raising finance and describe the ways in which they may gain access to long-term finance
Discuss the nature and implications of stock market efficiency
Outline the methods by which share capital may be issued

2. The stock exchange
Secondary market
Primary market
Two important roles

3. Distribution of UK listed businesses by equity market value50
200
150
100
Number of businesses
125
175 25 75
0 to 2
Market value range (£m) 28 26 53 99
104
176
120 91 69
1,000 to 2,000
500 to 1,000
250 to 500
100 to 250
50 to 100
25 to 50
10 to 25
5 to 10
2 to 5
117
Over 2,000
September 2010
Source: chart compiled from information in Primary Market Fact Sheet, London Stock Exchange, September 2010.

4. Stock exchange listing
Advantages for a business
Enables other businesses to be acquired by shares rather than cash
Shares valued in an efficient manner
Broadens investor base
Raises profile
Funds acquired at lower cost
Easier to raise funds
Can help attract and retain employees (share incentives)

5. Stock exchange listing (Continued)
Increased vulnerability to takeover
Close monitoring of actions and decisions
Increased regulatory burden
Cost (including management time)
Disadvantages for a business

6. The three levels of market efficiency
The weak form of efficiency
The semi-strong form of efficiency
The strong form of efficiency

7. Lessons of market efficiency
Timing doesn’t matter
Don’t search for undervalued businesses
Take note of market reaction
You can’t fool the market
The market decides the level of risk, not the business
Champion the interests of shareholders

8. Common methods of share issue
Rights issue
Placing
Offer for sale
Bonus issue
Public issue
Common issue methods

9. Bonus share issue Three possible reasons for an issue:
To improve the marketability of shares by reducing their price
To increase lender confidence
Three possible reasons for an issue:
To signal investors the directors confidence in the future

10. Problems of smaller businesses in raising finance
Lack of financial management skills
Lack of knowledge concerning the availability of finance
Inability to meet assessment criteria of lenders
Bureaucratic screening processes
Inability to provide security

11. Long-term finance for small businesses
Small business finance
Business angels
Alternative investment market
Private equity
Government assistance

12. Private equity – types of investment
Expansion capital
Venture capital
Replacement capital
Buy-out and buy-in capital
Rescue capital

13. Amount invested, by financing stage, 200950
100
300
250
200
150 £m
Venture capital
Expansion capital
Replacement capital
MBO/MBI
Rescue and other
400
388
335 30 71 76
Source: chart compiled from information in BVCA Private equity and venture capital report on investment activity 2009, p. 7,

14. The investment process
Obtain funds
Evaluate available investment opportunities and make a selection
Structure the terms of the investment
Step 1
Step 2
Step 3
Step 4
Implement the deal and monitor progress
Step 5
Achieve returns and exit from the investment
Source: M. Van der Wayer, ‘The venture capital vacuum’, Management Today, July 1995, pp. 60–4, Figure 7.9.

15. UK finance raised by private-equity firms by source, 2009
Funds of funds
Pension funds
Insurance companies
Corporate investors
Banks
Government agencies
Sovereign wealth funds
Other
Private individuals
Academic institutions £m
100
300
200
271
130 65 90
161
163 12
102 30
155
Source: chart compiled from information in BVCA Private equity and venture capital report on investment activity 2009, p. 14, www. bvca.co.uk.

16. Business angels Make decisions quickly Expect lower financial returns
Offer useful skills and experience
Make decisions quickly
Expect lower financial returns

17. Alternative investment market
Advantages over main market
Admission documents not pre-vetted
No prior shareholder approval for transactions
No trading record required
No minimum shares issued to public
No minimum market capitalisation

18. Distribution of AIM-listed businesses by equity market value
Number of businesses 50
250
200
150
100
0 to 2
103
173
181
261
194
122 99 37 17 4
1,000 to 2,000
500 to 1,000
250 to 500
100 to 250
50 to 100
25 to 50
10 to 25
5 to 10
2 to 5
Market value range (£m)
300
350
September 2010
Source: chart compiled from information in AIM market statistics, London Stock Exchange, September 2010.