Skip to main content

Financing and Refinancing

Financing Sources
Twelve Types of Funds

There is a thin line between an investment company (subject to the Investment Company Act of 1940) and a private investment firm, which may or may not be subject to that law. A list of private investment firms (some of which may also qualify as investment companies, depending on circumstances) includes:

  • Crossover funds invest in both public and private equity.
  • Exchange-traded funds can be traded on a stock exchange. Most exchange-traded funds track an index, for example, the SPDR Dow Jones Industrial Average. (See also Index funds.)
  • Fund of funds invest in other funds  including master-feeder and multiple-class funds.
  • Hedge funds are funds of investors (usually institutional) and wealthy individuals exempt from many investment company rules and able to use regulations, and can thus use aggressive investment strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage (investing in companies that have made and/or received acquisition tender offers), and derivatives—all ways of hedging investments.
  • Index funds track an index such the S&P 500 Index. These funds are generally sold through a mutual fund broker; they are not generally considered to be exchange-traded funds (although some exchange-traded funds do track an index).
  • Leasing funds invest in leases. Some funds focus on a particular kind of lease, such as aircraft leasing.
  • Mezzanine funds invest in relatively large loans that are generally unsecured (not backed by a pledging of assets) or have a deeply subordinated security structure (e.g., third lien). These funds provide mezzanine financing, which is considered to be a hybrid between debt (at the highest level of financing) and equity (at the lowest level)—hence the term mezzanine.
  • Pledge funds are  through multiple pledges from individual investors.
  • Private equity (LBO/MBO) funds buy all the stock in a public company, or buy a unit of a public company, and thus take the company or unit private. See further discussion later in this chapter.
  • Real estate funds invest in real estate, often structured as real estate investment trusts (REITs).
  • SBIC funds qualify as Small Business Investment Companies (SBICs) under a Small Business Administration (SBA) program to encourage small business investing.
  • Venture capital funds manage money from investors who want to buy stock in smaller companies with potential for growth.

Note that the use of these sources varies by company size. Financing sources for small businesses include personal savings, personal loans (from family members), loans from banks (including small community banks), credit cards, loans backed by the SBA, and loans from credit unions. If a small company decides to buy another one, it is likely to use one of these sources to expand. (The majority of M&A transactions are valued at under $50 million.)

At the other extreme, the large multinational company will raise capital through a variety of debt and structured finance transactions, including syndicated loans, leveraged loans, high-yield bond offerings, mezzanine financing, project finance, equipment financings, restructurings, and securitizations. These sources, too, can be used to fund mergers—generally through commercial and/or investment banks.