January 26, 2022

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Unrealized Investment Meaning and Key Explanations

Unrealized Investment Meaning and Key Explanations
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In Venture Capital or Private Equity Investment, there is the need to know the startups where the VC holds investment and those that it has exited from. In this article, I will drill you on the unrealized investment of a private equity fund.

Definition of Unrealized Investment

Unrealized investment is that part of a private equity fund that has not been exited from by the venture capitalist in an existing startup. According to Andrew and Ayako in the book Venture Capital and the finance of innovation, unrealized investments “are those investments that have not yet been exited in companies that still exist.”

Key Explanation of Unrealized Investment

Unrealized investment is a part of a VC fund or investment that is ongoing. The VC firm has a stake in the company and it may or may not have any plan of exit from the startup. Venture capital firms may have a couple of companies it has invested in. As long as their investment remains with these entities, they are an unrealized investment to the financial intermediary.

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Investments by Venture capital firms are called private equity funds or VC funds. The fund is invested on several companies. And the VC has one goal. Which is to find an exit path. The exit path might be a merger and acquisition deal or through an initial public offering of its shares in a recognized stock exchange market. There are examples of these. Jumia, an e-commerce giant in Nigeria sees its exit from its VC. How? When it launched its initial public offering in the New York Stock Exchange. Paystack, a Nigerian Financial technology firm saw its exit when Stripe acquired the company through a Merger and Acquisition deal.

A VC firm exits from the investee company shows a realized investment. An unrealized investment is an investment in an investee company or startup (as in private equity terminology). Generally, a maximum of ten years is allowed as the investment period. This period is when there is an unrealized investment. Because the VC firm holds part of its fund in the startup in that period.

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The reason why VCs separate their investments as realized and unrealized is to differentiate the startups that hold part of the committed capital of the limited partners. What this means is that the VCs are accountable to the limited partners. Therefore, it’s paramount to state the companies investments are unrealized to the limited partners.

Conclusion

To wrap it up, unrealized investment is those investments that have not yet been exited in companies that still exist. VCs need to state those startups they are yet to exit from. This helps VCs to be accountable to their limited partners.

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