What is 'Capital Injection'
Capital injection is an investment of capital into a company or institution, generally in the form of cash, equity or debt. The word "injection" connotes that the company or institution into which capital is being invested may be in financial distress, although it is not uncommon for the term to also refer to investments made in a startup or a new company.
BREAKING DOWN 'Capital Injection'Capital injections in the private sector are usually made in exchange for an equity stake in the company into which capital is being injected.
Capital injections can occur throughout the life cycle of a business. For example, when a company is first founded, it may open a seed round of cash investments 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 further, it can either open a series-A investment round or it can take out debt, both of which are capital injections. If a mature company decides to go public, the money it earns through the issuance of public shares is also a capital injection.
Examples of Capital Injections
However, these are not the only ways that a company or organization can receive a capital injection. Sometimes, governments make capital injections into struggling sectors to assist in their stabilization for the good of the larger public. In a case like this, a government may negotiate an equity stake in recipient companies or institutions. It may also treat the capital injection as debt that must be repaid. For example, following the unprecedented financial crisis of 2008, the U.S. government – as well as a number of other governments around the world – injected hundreds of billions of dollars into their financial sectors in an attempt to halt the conflagration that was threatening to engulf the global economy.
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 SpA, Italy's oldest commercial bank, has faced multiple instances of financial distress. In fact, the bank has already received two capital injections by the Italian government as of July 19, 2016, and it is expected to receive a third injection in 2016.
The floundering bank was hit hard 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 Paschia $167 billion capital injection. The potential injection would come in the form of convertible bonds purchased by the government.