What Is a Capital Injection?
A capital injection is an investment of capital into a project, company, or investment, typically in the form of cash, equity, or debt. Oftentimes, the word injection implies that the company or organization receiving funding may be in financial distress. However, the term may also refer more broadly to all types of one-off capital investments, including those made in a startup or a growing company.
- A capital injection is a lump-sum investment, typically in the form of cash, but may also consist of equity or debt.
- Capital injections can be obtained for a variety of purposes including startup funding, growth, initial public offerings, distress, or bailout funding.
- When the government offers a capital injection bailout it provides capital to an ailing industry or prominent companies with tax dollars to pay for the investment but the funding is typically structured as either a loan or equity investment which provides a return over the long-term.
Capital Injection Explained
Capital injections in the private sector are usually in exchange for an equity stake in the company from which the investor is investing. Capital injections can occur throughout the various life cycles of a business. For example, financing in the form of a capital injection may open a seed round from friends, family, and hand-selected angel investors.
In return, the investors receive a portion of the company’s ownership. If a private company in a growth phase wants to fund its momentum, that company can open a series A investment round, or it can assume debt, both of which are capital injections. If a mature company decides to go public, the money earned through the issuance of shares is also a capital injection.
There are other ways that a company or organization can receive a capital injection. Sometimes, governments will inject capital into struggling sectors to stabilize them for the public good. The government may negotiate an equity stake in recipient companies or institutions, or it may treat the capital injection as a debt obligation.
Examples of Capital Injections
For example, following the financial crisis of 2008, the U.S. government, as well as other governments around the world, injected hundreds of billions of dollars into their financial sectors. These capital injections were an attempt to halt the conflagration that was threatening to engulf the global economy.
As of February 2019, the U.S. government has received $740 billion from bailout inflows, covering the total bailout spending of $632 billion, with a profit of $107 billion.
Some international financial institutions have never recovered from the 2008 crisis and require consistent capital injections to remain afloat. For example, Banca Monte dei Paschi di Siena S.p.A., Italy’s oldest commercial bank, has faced multiple instances of financial distress. The floundering bank was stricken after the United Kingdom voted to leave the European Union in June 2016, and the European Commission responded by authorizing the Italian government to give Monte Paschi a capital injection. The bailout failed.
According to Bloomberg, in January 2019, the bank announced it would seek capital through a covered bond sale. The bank had last requested state aid in 2017. At that time, the Italian government assumed 68% ownership in return for a 5.4 billion euro injection and as part of an 8.3 billion-euro recapitalization. The bank’s shares have lost 70% of their value from October 2017 to January 2019.
View more information: https://www.investopedia.com/terms/c/capital-injection.asp