23'2'5 Securities Brokers and Dealers

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23.2.5 Securities Brokers and Dealers

• Securities Dealers (?????)
• Hold inventories of securities on their own
  account
• Provide liquidity to the market by standing by
  ready to buy or sell securities (market maker)
• Especially important for thinly traded securities
  (???????)

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23.3 Regulation of Securities Firms

• Two acts passed in 1933 and 1934 provide the
  primary basis of todays markets. The major
  provisions include
• Establishment of the SEC
• Registration requirement for new securities
• Reporting requirements for companies and
  insiders
• Prohibition of market manipulation

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23.3.1 Relationship Between Securities Firms and
Commercial Banks

• Glass-Steagall stipulated that investment banking
  and commercial banking would be separated.
• G-L-B Act removed some of these barriers.
• Commercial banks are slowly gaining regulatory
  permission to engage in the full range of
  services offered by investment banks.

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23.4.1 Venture Capital Firms

• These firms provide funds for start-up companies
• Often become very involved with firm management
  and provide expertise

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23.4.2 Venture Capital Firms

• Description of Industry
• Typically limited partnerships
• Examples of venture-backed firms include Apple
  Computer, Cisco Systems, Starbucks, TCBY, etc.
• Table on next slide shows the level of venture
  involvement in companies over the last fourteen
  years.

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23.4.4 Venture Capital Investments
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23.4.5 Venture Capitalists Reduce Asymmetric
Information

• Managers of start-ups may have objectives that
  differ significantly from profit maximization.
• Venture capitalists can reduce this information
  problem in several ways
• Long-term motivation (dont expect return in
  short term)
• Sit on the board of directors
• Disburse (??) funds in stages, based on required
  results
• Invest in several firms, diversifying some risk

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23.4.6 Origins of Venture Capital

• First U.S. venture capital firm was established
  in 1946.
• Most venture capital firms in the 1950s and 1960s
  funded development in oil and real estate.
• Funding has shifted from wealthy individuals to
  pension funds / corporations. This is one of
  the few risky investments pension funds are
  permitted.

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23.4.7 Structure of Venture Capital Firms

• Most are limited partnerships
• Source of capital includes wealthy individuals,
  pension funds, and corporations
• Investors must be willing to wait years before
  withdrawing money

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23.4.8 Life of Venture Capital Deal

• Fundraising
• Venture firm solicits (??,??) commitments,
  usually less than 100 per deal
• Investment phase
• Seed investing
• Early stage investing
• Later stage investing
• Exit
• Usually IPO or merger

National Venture Capital Association (click on
Industry Research) http//www.nvca.com
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23.4.9 Venture Profitability

• The 20-year average return is over 20, with seed
  investing providing the highest average (24.5)
  and later stage funding providing the lowest
  (18).
• Despite some phenomenal years (1999), venture
  capital has had negative returns in recent years.

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Chapter Summary

• Investment Banks the role of investment banks in
  issuing new securities and other important roles
  was discussed.
• Security Brokers and Dealers the importance of
  dealers and brokers in making markets and
  offering services to investors was presented.

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Chapter Summary (cont.)

• Regulation of Securities Firms the primary
  provisions of the two acts in 1933 and 1934 were
  summarized.
• Relationship Between Securities Firms and
  Commercial Banks with the changes in
  legislation, the blurring of these two industries
  was discussed.

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Chapter Summary (cont.)

• Venture Capital Firms the important roles that
  venture capital firms play in young, start-up
  companies was presented, as well as venture
  structure and performance over the last 20 years.

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Terms

• Chapter 10
• Default risk
• Call provisions
• sinking fund
• convertible bonds
• current yield
• chapter 11
• PE ratio
• Gordon growth model
• Chapter 12
• Down payments
• Amortization

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Terms

• Chapter 15
• Principal-agent Problem
• Equity capital
• Chapter 21
• Open-end fund
• load fund
• Free-rider Problem
• Closed-end fund
• Hedge fund
• Chapter 23
• Private Placements
• hostile takeovers
• Market Order
• Secondary market

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Discussions

• Chapter 5
• Discuss what is shown by a yield curve.
• Chapter 6
• What does the efficient market hypothesis tell?
  Does it make sense?
• Chapter 17
• Distinguish between a banks reserves, required
  reserves, excess reserves, and secondary
  reserves.
• Chapter 15
• What factors usually cause an increase in moral
  hazard and adverse selection?