Equity and quasi-equity

What are equity investments?

When a company raises capital by issuing equity, it offers in return a share in the ownership of the company. In other words, the company sells shares to an investor against an agreed price per share.

The company can give out a minority share (less than 50%) or a majority share (more than 50%). Public shares are usually issued by larger companies, as they are able to cover the (high) expense of issuing public equity such as listing on a stock market and obtaining credit ratings. The value of the shares is dependent on the performance of the company as assessed by the investors.

What is Equity in general?

Equity represents a share of a company. If a company decides to offer equity to finance its initiatives, a part of the company is being sold. As a result, for the investor, the return on investment is variable and is based on the company’s cash flow and increased/decreased value of assets. Equity is, therefore, a risk-bearing instrument.

What are quasi-equity investments?

Quasi-equity is a hybrid form of finance with characteristics of both debt and equity investments. Quasi-equity offers non-dilutive equity risk capital that is paid back based on the performance of the company. Non-dilutive means that the current owners do not lose any part of their ownership in the company.

Quasi-equity is also known as venture debt. Quasi-equity is especially applicable to (innovative) SMEs and mid-caps seeking to invest in R&D. Due to the equity component, the firm is given a more generous schedule for repayment of the loan than would be the case with a traditional loan.