In equity financing the capital is raised by selling shares (stocks) in the capital market. In this kind of a transaction the investors buy a portion of equity in the company in the form of shares. Equity financing comes from the private placement of shares with investors and public stock offerings in listed public company or a non-listed entity. In equity financing the company does not have repayment obligation but the company is obliged to share profits. Equity financing is usually used to finance high risk projects that are usually not financed by debt instruments. Equity financing can fund net zero developmental projects in the private sector.
Advantages: The main advantage of this funding type is that equity shares usually bring in investor knowledge. Usually, the sale to an investor comes in exchange for experience and market experience, with the assumption that this knowledge will benefit the entity that is selling in improving or growing. In exchange of the investment the investor becomes a shareholder and is entitled to a dividend at the end of every year. A dividend is a portion of the profit in proportion to the shares possessed. Equity can finance innovative, high risk and niche projects. It can finance capital intensive projects.
Usually large scale projects are more attractive for the equity investors. In equity there is dilution of ownership owing to sale of shares to investors. The profits are shared amongst the shareholders and the shareholders need to be consulted with regards to decisions that impact the company. Hence, a certain amount of control (dependent on the size of the equity share) is handed over to the investor.
TYPES OF EQUITY FINANCING
Private equity is an investment in a company, or an entity not publicly listed or traded with the intent to take full control (majority owned) of the company after the buyout. The aim is to streamline operations, increase revenues and sell it at a profit. Private equity firms pool the assets of multiple investors and generate large capitals for investments. With the successful mainstreaming of Environmental, Social and Governance (ESG) investing, private equity fund managers are compelled to produce new innovative products to meet the increasing demand for private equity in the ESG space. Private equity firms use both equity and debt in their investment. Private equity can play an important role in PPP infrastructure renewal projects.
Venture capital funds entrepreneurs, start-ups and young businesses with high growth potential who lack access to bank loans and other debt instruments. Venture capital firms pool in resources from a few investors who are offered substantial portions of the company on limited partnerships basis against their investment. Venture capital can provide funding to innovative, high risk niche projects. It can be a tool for the municipalities to spur innovation in achieving net zero development bottom up.
Green equity is the process of investing equity capital in emissions-reducing projects ensuring environmental sustainability. An example of this would be a private equity fund supporting renewable energy projects by investing equity capital through project financing. This type of financing appeals to a wider target audience, given it provides both financial and environmental returns for investors with the relevant interests.
W. P. Pauw, L. Kempa, U. Moslener, C. Grüning & C.Çevik (2022) A focus on market imperfections can help governments to mobilize private investments in adaptation, Climate and Development, 14:1, 91-97, DOI: 10.1080/17565529.2021.1885337