Venture capital, growth equity, and buyouts are the three primary categories of private equity strategy. Each of these techniques has a role in the life cycle of an organization, even if they don’t compete with one another and require different abilities to succeed. To help you develop portfolios, here is a closer look at each private equity strategy.
- Venture Capital
An early-stage startup may get venture capital (VC) and private equity funding, according to Joseph Stone Capital. In exchange for a portion of the firm, venture capitalists provide the business with a specified amount of seed cash. Founders may find it appealing that venture funders do not want a majority share (more than 50%). Because startups haven’t yet demonstrated their potential to produce a profit, venture capital investing is inherently risky because many are little more than concepts at the time of a pitch. The return on investment from venture capital is never guaranteed, just like with any other investment. Venture investors, meanwhile, may stand to gain millions or even billions of dollars if a business turns out to be the next big thing.
- Growth Equity
Growth equity, which involves a financial investment in an established, expanding company, is the second private equity strategy. Later in a company’s lifetime, when it is built but needs additional money to grow, growth equity comes into play. Growth equity investments are given in exchange for equity, often a minority portion, just as venture capital. Growth equity investors, in contrast to venture capitalists, can examine the company’s financial history, speak with customers, and test the product before determining whether it is a sensible investment. Growth equity offers the option for the company to demonstrate that it can generate a return before the private equity firm invests, reducing the risk inherent in all investments.
Many corporations that engage in growth equity keep track of the financial data of emerging businesses over time, often for as long as 10 or 15 years. That enables people to identify companies generating revenue and increasing quickly and get with them when they require cash to keep growing.
- Buyouts
Buyouts are the last private equity tactic and the most advanced in the firm lifecycle, according to Joseph Stone Capital. Buyouts take when a mature, public company is taken private and bought by either the existing management team or a private equity group. The money used for private equity investments gets used for this kind of investment. When a buyout takes, all of the former investors in the company sell their shares and leave. The management group or private equity firm assumes the role of the single investor and is required to own a controlling stake (greater than 50%) in the business. Buyouts can be of two different types:
- Management buyouts are transactions in which the company’s current management team purchases its assets and obtains a controlling interest.
- Leveraged buyouts are buyouts that get financed with borrowed funds.
