Finance: Venture Capital & Private Equity

Private equity vs. venture capital: What’s the difference?

PE and VC primarily differ from each other in the following ways:

• The types of companies they invest in
• The levels of capital invested
• The amount of equity they obtain through their investments
• When they get involved during a company's lifecycle

Quoted from:
Pitchbook blog. (2021, July 15). Private equity vs. venture capital: What’s the difference? Pitchbook. https://pitchbook.com/blog/private-equity-vs-venture-capital-whats-the-difference

Venture Capital

Venture capital (VC) is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks, and any other financial institutions. However, it does not always take a monetary form; it can also be provided in the form of technical or managerial expertise. Venture capital is typically allocated to small companies with exceptional growth potential, or to companies that have grown quickly and appear poised to continue to expand.

Though it can be risky for investors who put up funds, the potential for above-average returns is an attractive payoff. For new companies or ventures that have a limited operating history (under two years), venture capital funding is increasingly becoming a popular – even essential – source for raising capital, especially if they lack access to capital markets, bank loans, or other debt instruments. The main downside is that the investors usually get equity in the company, and, thus, a say in company decisions.

KEY TAKEAWAYS

• Venture capital financing is funding provided to companies and entrepreneurs. It can be provided at different stages of their evolution, although it often involves early and seed round funding.
• Venture capital funds manage pooled investments in high-growth opportunities in startups and other early-stage firms and are typically only open to accredited investors.
• It has evolved from a niche activity at the end of the Second World War into a sophisticated industry with multiple players that play an important role in spurring innovation.

Quoted from:
Hayes, A. (2021, May 15). Venture Capital. Investopedia.
https://www.investopedia.com/terms/v/venturecapital.asp

Venture Capital Firms

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Angel Investors

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Private Equity

Private equity is an alternative investment class and consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet. 

A private equity fund has Limited Partners (LP), who typically own 99 percent of shares in a fund and have limited liability, and General Partners (GP), who own 1 percent of shares and have full liability. The latter are also responsible for executing and operating the investment.

KEY TAKEAWAYS

• Private equity is an alternative form of private financing, away from public markets, in which funds and investors directly invest in companies or engage in buyouts of such companies.
• Private equity firms make money by charging management and performance fees from investors in a fund.
• Among the advantages of private equity are easy access to alternate forms of capital for entrepreneurs and company founders and less stress of quarterly performance. Those advantages are offset by the fact that private equity valuations are not set by market forces.
• Private equity can take on various forms, from complex leveraged buyouts to venture capital.

Quoted from:
Chen, J. (2021, April 30). Private Equity. Investopedia. 
https://www.investopedia.com/terms/p/privateequity.asp

What is private equity and how does it work?

What is a private equity firm?

• A private equity firm is a type of investment firm. They invest in businesses with a goal of increasing their value over time before eventually selling the company at a profit. Similar to venture capital (VC) firms, PE firms use capital raised from limited partners (LPs) to invest in promising private companies. Unlike VC firms, PE firms often take a majority stake—50% ownership or more—when they invest in companies. Private equity firms usually have majority ownership of multiple companies at once. A firm's array of companies is called its portfolio, and the businesses themselves, portfolio companies.

What is a private equity investor?

• Investors working at a private equity firm are called private equity investors. They are critical to raising capital as well as identifying companies that will make good investment opportunities. As of 2017, there were 3,953 active PE investors, which represents a 51% increase since 2007.

What is a private equity fund?

• To invest in a company, private equity investors raise pools of capital from limited partners to form a fund—also known as a private equity fund. Once they’ve hit their fundraising goal, they close the fund and invest that capital into promising companies.

Quoted from:
Pitchbook blog. (2021, June 9). What is private equity and how does it work? Pitchbook. https://pitchbook.com/blog/what-is-private-equity

Private Equity Resources