What Is Private Equity?
The most common and popular choice in the current financial market is the private equity companies which is also known as PE companies. In this article, we have explained in-depth about the private equity companies. The topics will include types of PEs, how they work, what do they do, methods of equity transactions, and how investors can gain access to the PE companies.
What Is Private Equity?
Any equity, i.e. shares of a privately held company which are cannot be publicly listed/traded are known as the private equity. Private equity is a source of investment made by the high net worth individuals to acquire the shares of a private company or obtain control over the public companies to convert it into private by delisting them from the stock exchange. The private equity industry is made up of institutional investors like pension funds and large private equity companies which are funded by the group of accredited investors.
The private equity industry majorly dominated by investors with strong financial capacity as the common expectation is to make the direct investment to gain a significant role in the company’s operations. The minimal amount of investment may vary depending on the size and type of company. Some companies have minimum criteria of $250,000 for investment requirement while some may have larger requirements of millions of dollars.
What is the difference between private equity and venture capital?
Most people confuse between the private equity and venture capital as both of them have a common mode of business, i.e. investing in small or private companies and exiting by selling their equity finance through IPO, merger or acquisition. The unique difference between both the types of investment companies is the type of companies, size of the company, amount of investment and percentages of equity they avail.
The private equity companies are majorly interested in buying mature companies which have established a business market. The company looking for additional funds may not be performing as an expectation or not making enough profits as it should. The role of private equity is to purchase these under-performing companies and streamlining their operations to enhance the profitability. On the other hand, venture capital companies invest in start-ups or small businesses with high growth potential.
The companies in which the private equity firms invest is mostly 100% owned by them. In short, the companies are totally in control of the private equity firms which has invested in the company. The venture capital firms invest in 50% or less of the equity of the companies. The concept of the venture capital firms is to reduce the risk by investing in multiple companies by which in the case of start-up fails then the entire fund in the venture capital is not affected significantly.
The private equity firms majorly focus on the single company rather than investing in multiple companies. The investment size of the private equity may go up to $100 million in a single company which has established and mature market. Due to the stronghold of the company in the market the chance occurring loss is very minimal in such companies.
The size of investment in venture capital is around $10 million or less as they majorly deal with start-ups or small businesses with unpredictable failure or success.
The private equity has the flexibility to invest or purchase companies in any segment or industry while the venture capital is limited to startup or small businesses in technology, biotechnology or clean technology.
The private equity firms can use both cash and debt to make their investment, but venture capital firms deal only with equity.