Final answer:
Pension funds do not advise on issuing securities in the primary market; investment banks do. They help price securities, manage the issuance process, and offer strategic advisory. Small firms prefer private investors initially due to cost and complexity but may turn to IPOs for substantial capital growth without debt obligations.
Step-by-step explanation:
Entities that provide advice to governments and corporations wishing to issue new securities in the primary market are investment banks, not pension funds. Investment banks specialize in underwriting new securities, which involves setting the initial offer price and purchasing the securities from the issuer to sell them to investors. Additionally, they provide strategic advisory services to guide the entire process. Pension funds, on the other hand, are typically investors in primary and secondary markets but do not offer advisory services for new issuances.
Early-stage corporate finance involves several considerations for small companies:
- Private investors are often preferred by very small companies as initial public offerings (IPOs) are costly and require a firm to meet regulatory standards that a small entity might not be able to comply with easily due to the cost and complexity.
- As companies grow, an IPO can be appealing as it can provide more substantial capital and a way to reward employees and initial investors through the sale of stock. Unlike borrowing from a bank or issuing bonds, an IPO does not require regular interest payments and can provide access to a broader capital pool.
- A venture capitalist typically has better information about the profit potential of a small firm than a bondholder because they engage in due diligence and often have a hands-on role in the company's growth, offering both capital and expert guidance.
From a firm's standpoint, a bond is similar to a bank loan in that both are forms of borrowed capital that the company must repay. However, they differ in terms of the issuance process, loan covenants, flexibility in terms of payment schedules, and security against company assets.