What Is Capital Injection?
Capital injection is an investment of capital into a company or institution, typically in the form of cash, equity, or debt. The word injection connotes that the company or organization receiving funding may be in financial distress. However, the term also refers to investments made in a startup or a new company.
Capital Injection Explained
Capital injections in the private sector are usually an exchange for an equity stake in the company receiving the funds. Capital injections occur throughout the life cycle 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.
Examples of Capital Injections
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. 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.
[Important: When a government provides capital to an ailing industry or prominent companies, it uses tax funds to pay for the handouts. The decision to inject taxpayers' capital into companies may be justified to boost economic growth or prevent an economic collapse.]
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 since from October 2017 to January 2019.
- A capital investment is typically in the form of cash, equity, or debt.
- Although often considered a measure to boost an ailing company or sector, capital injections are often seed funding for new ventures.
- When a government provides funds to an ailing sector or economically important company, the cost is born by the taxpayer.
[Fast Fact: Following the financial crisis of 2008, according to Renae Merle, a reporter for the Washington Post, the Treasury Department injected $412 billion into banks, auto manufacturers, and other failing companies through the Troubled Asset Relief Program (TARP). By the end of 2017, the government had recouped its costs and made a profit on the capital injections of $12 billion.]