Caroline Banton has 6+ years of experience as a freelance writer of business and finance articles. She also writes biographies for Story Terrace.
Updated November 23, 2020 Reviewed by Reviewed by David KindnessDavid Kindness is a Certified Public Accountant (CPA) and an expert in the fields of financial accounting, corporate and individual tax planning and preparation, and investing and retirement planning. David has helped thousands of clients improve their accounting and financial systems, create budgets, and minimize their taxes.
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.
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.
In banking, an infusion of capital—known as a capital addition—can help the financial institution meet its reserve requirements and allow it to make additional investments or loans.
Sometimes, governments 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.
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.