Quick Answer
Understanding why investors hold a stock or buy a new issue drives financing-strategy design. The exam-relevant objectives are growth at a reasonable price (GARP), growth, aggressive growth, value income, and capital appreciation. The strategies are distressed, value, deep value, momentum, index, quantitative, arbitrage (including risk arbitrage), long, short, special situations, income, and sector specific.
The investor-mix view from the prior section answers "who owns this?" This section answers "what are they trying to accomplish?", the framework bankers use to match a new offering to the right investor base.
Investment Objectives
Objectives describe the goal of the investment.
| Objective | Investor Goal |
|---|---|
| GARP (growth at a reasonable price) | Growth stocks at moderate multiples (not the most expensive growth names) |
| Growth | Above-average earnings growth |
| Aggressive growth | High growth, high volatility, often early-stage |
| Value income | Undervalued securities that also pay current income |
| Capital appreciation | Long-term price gains; current income is secondary |
Think of it this way: Objectives describe the destination. A capital-appreciation investor doesn't care about today's dividend; an income investor does. A growth investor accepts volatility for upside; an aggressive-growth investor accepts even more.
Investment Strategies
Strategies describe how the investor gets there.
| Strategy | Approach |
|---|---|
| Distressed | Securities of companies in financial trouble or bankruptcy |
| Value | Stocks trading below intrinsic value |
| Deep value | Severely beaten-down names, often near or below liquidation value |
| Momentum trading | Riding price and volume trends |
| Index | Track a benchmark index passively |
| Quantitative | Algorithmic, rules-based, formula-driven |
| Arbitrage | Profit from mispricings between related securities |
| Risk arbitrage | Merger arbitrage: long the target, short the acquirer in announced deals |
| Long | Bet on price appreciation |
| Short | Bet on price decline |
| Special situations | Spinoffs, restructurings, post-bankruptcy equity, event-driven |
| Income | Steady current yield from dividends or coupons |
| Sector specific | Concentrated in one industry |
Why This Matters for Financing
The objective-and-strategy view determines which investors should be in a new offering's order book.
- A growth-stage technology IPO targets growth and aggressive-growth funds, not income or value managers
- A distressed company's exchange offer targets distressed-debt and special-situations funds
- A spinoff targets special-situations and event-driven managers who specialize in the unique post-spin dynamics
- A high-dividend industrial follow-on targets income and value-income funds
Matching the security to the strategy is the work the financial-advisor team does before the roadshow opens.
Exam Tip: Gotchas
- Risk arbitrage is merger arbitrage, not a general "arbitrage" strategy. The risk-arb playbook is long the target and short the acquirer in an announced deal; the bet is on deal completion at the announced terms. If the deal breaks, risk arbs lose.
- GARP is "growth at a reasonable price," NOT a separate category from growth. It's a sub-strategy that filters growth names by valuation: owning the cheaper end of the growth universe.
- Special situations and event-driven overlap in practice. Both target one-time events (spinoffs, restructurings, post-bankruptcy emergence) where the standard valuation frameworks break down.