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The Essential Guide to Private Equity

In venture capital, an investor or a firm buys a stake in an early stage startup. It’s the kind of investment that most people will be familiar with from stories about tech companies in Silicon Valley: someone has an idea for a web-based platform or service, which they have to pitch to investors so they have a chance to acquire it. have capital. it off the ground. But venture capital firms can potentially invest in companies from a variety of industries.

Of the different types of private equity investments, venture capital is the most inherently risky; A lot of startups aren’t very far past the idea stage when they make their pitch, and it can take years for them to prove their ability to make a profit — if they can be profitable at all. Still, for a lot of venture capitalists, the chance to get on the ground floor of the next Facebook or Netflix is ​​worth it.

Meanwhile, growth equity strategies focus on investing capital in established, growing companies. While those companies are ahead in their business cycle, they still need additional funding to grow or be competitive with their industry rivals. Because they focus on companies that already have a business history, growth equity investors have the opportunity to do more research — view a company’s financial records, interview customers, and try out its product, for example. For – before they invest.

Finally, buyout strategies involve private equity firms buying mature and typically publicly listed companies. This is the most common category in the private equity sector.

When a buyout occurs, all previous investors in the company redeem their shares and exit, leaving the private equity firm as the sole investor with a controlling stake (i.e., more than 50% of the company’s shares). Huh. With that controlling share, the PE firm or management team has a greater say in the way the company is run, giving them more opportunity to implement internal improvements that will hopefully, over time, provide a return on investment.

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