Quasi-Equity and Quasi Capital
Lack of funding opportunities is a common phenomenon in social enterprises. The meaning of quasi-equity is the use of a business plan and worksheet by businesses to offer combinations of risks and return so that they can get investors. This way of attracting investors is only meant for conventional businesses. The ones who have to suffer are the social enterprises that find it difficult to attract investors that way. Instead, they use two innovative financial vehicles- Quasi-Equity Debt and Social Impact Bonds to enhance their funding opportunities from the investors.
What is Meant by Quasi Capital?
Quasi capital is also known as revenue participation investment. It helps in filling the space that lies in between debt and capital. It is the kind of investment where the investee’s future revenue stream is calculated based on the financial return. It is a useful source of finance.
When does a Quasi Loan Arise?
A quasi-equity loan arises when an enterprise suffers a liability at a situation when the director is under a compulsion to repay the company for the amount involved.
What is Quasi-Equity?
While understanding the quasi-equity meaning, one must know that there is a sheer lack of funding opportunities when it comes to social enterprises. Therefore to overcome this form of hindrances, the enterprises make use of a financial vehicle that has the association of properties of debt along with the equity. However, it is also important to understand that if it is a non-profit enterprise then it cannot acquire equity capital. This states the fundamental fact that Quasi-equity debt is more useful in terms of security. It is a form of debt and also it is important to consider that its returns are indexed against the financial performance of the enterprise. The debt also requires the holder of the security has no direct entitlement towards the ownership and power of the enterprise.
Besides, the terms and the conditions offer loans to the enterprise so that they can carry out the operations of the enterprise smoothly. These forms of securities are purchased by social investors. The security opens the door for social enterprises so that they can offer other lenders and banks a competitive investment opportunity.
What is Quasi-Equity Meaning in Banking?
The revenue participation agreement or quasi-equity is a kind of financial tool that provides an opportunity for the investor and as well the investee to share the reward and risk of enterprise in a flexible manner that debt does not allow. This applies to a situation where equity financing is not possible. However, it is also important to understand that the characteristics of quasi-equity financing would involve either being an unsecured loan or it can also be a flexible loan repayment option. The common examples of this form of debt are mezzanine debt and junior debt as these two debts are both unsecured and flexible in terms of the repayment schedule of the loan. It is through this sort of financial loan that we can understand the meaning of quasi-equity.
What do We Understand by the Quasi-Equity Debt/ Equity Ratio?
Quasi-equity is regarded as a form of debt that some of its characteristics are quite similar to that of the equity. This type of debt includes flexible payment options that are unsecured or have no collateral. This debt is only used to calculate the ratio rather than the total debt.
What is Meant by a Social Impact Bond?
This is the kind of bond that benefits the government fund infrastructure and also the service costs. Social impact bond plays a crucial role during cuts in the public budgets and hectic municipal markets. It was launched in the UK in the year 2010. Besides, this bond was only sold to the private investors who could enjoy the returns only if the public project succeeded. For instance, if a program like rehabilitation reduces the rate of involvement among newly released convicts, it is then when the investors can expect returns. Investors receive returns at this point because they get an occasion to take planned risks for profits. Also, in such cases, the government pays the investors a fixed return for any form of demonstrable results. The bond can potentially change the discussions about the expansion of social services when they shift the chances of failure of the program to the investors from the taxpayers.
FAQs on Quasi-Equity Debt: Understanding Social Impact Bonds
1. What exactly is quasi-equity debt?
Quasi-equity debt is a unique type of financing that blends features of both debt and equity. It acts like a loan, but its repayment terms are often flexible and linked to the organisation's performance, similar to how an equity investor's return depends on success. It is commonly used by social enterprises or non-profits that cannot issue traditional ownership shares.
2. What is a Social Impact Bond (SIB) and how does it work?
A Social Impact Bond (SIB) is not a traditional bond but a results-based contract. Here’s how it works:
- Private investors provide the initial funding for a specific social project run by a service provider.
- An independent evaluator measures whether the project has achieved its pre-agreed social outcomes.
- If the project is successful, a government body or foundation repays the investors their principal plus a financial return. If it fails, the investors may lose their money.
3. How is quasi-equity different from regular debt and equity?
Quasi-equity sits between traditional debt and equity, offering a unique balance of features:
- Traditional Debt: This is a simple loan. You borrow money and must repay it with interest on a fixed schedule, regardless of your company's performance. The lender does not get any ownership.
- Traditional Equity: This is selling a part of your company. Investors give you capital in exchange for an ownership stake and a share of future profits. There is no obligation to repay the money.
- Quasi-Equity: This is a loan where repayment is flexible. For instance, you might pay back more when your revenues are high and less when they are low. It gives the lender a stake in your success without giving up ownership of your company.
4. Can you give a real-world example of how quasi-equity is used?
Imagine a social enterprise that aims to reduce plastic waste by turning it into bricks. It needs ₹50 lakhs for machinery but, as a non-profit, cannot sell shares. It secures a quasi-equity loan. Instead of fixed monthly payments, the agreement states that the enterprise will repay the loan with 5% of its annual revenue for ten years. This way, if sales are slow in the first year, the repayment amount is small and manageable. If the enterprise becomes very successful, the lender shares in that success through higher repayments.
5. Why would an investor choose a Social Impact Bond over a traditional investment?
Investors are drawn to Social Impact Bonds for two main reasons, often called a 'double bottom line' return:
- Financial Return: SIBs offer the potential for a competitive financial return, but only if the social project succeeds. This links financial gain directly to positive social outcomes.
- Social Return: It allows investors to fund projects they care about and see a measurable, positive change in society. This is a core principle of impact investing, where the goal is to create social or environmental benefits alongside financial profit.
6. What are some common types of quasi-equity instruments?
Several financial instruments can be structured as quasi-equity. Some of the most common types include:
- Subordinated Debt: A loan that will only be repaid after all other senior debts are paid if the company liquidates. This higher risk for the lender is a key equity-like feature.
- Convertible Notes: A loan that can be converted into equity (ownership) at a future date, usually during the next funding round.
- Income-Sharing Agreements: The borrower agrees to pay back the loan by sharing a percentage of their future revenue.
7. How is quasi-equity shown on a company's balance sheet?
This is a key point for commerce students. Quasi-equity is not shown in the 'Shareholders' Equity' section because it doesn't represent ownership. Instead, it is recorded as a liability. However, it is typically classified as a long-term, subordinated liability and is often listed separately from senior debt to clearly signal to anyone reading the balance sheet that it has a lower priority for repayment.
