Types of Private Equity Investments

Private equity or PE investments help businesses thrive through capital infusion from willing investors. Later, they can utilize the increased capacity to expand operations and regional headcounts. Investors’ support allows brands to develop new product research roadmaps and reduce debt-related liabilities. However, investors do not get hassle-free access to a private company’s financial, reputational, and legal history, unlike what they can quickly check when investing in a publicly-held enterprise. This post will explore the types of private equity investments that enhance investors’ portfolios while reliably predicting returns through data-backed performance and investment disclosures. 

What is Private Equity? 

Private equity facilitates investments into unlisted companies. So, the companies can achieve fundraising goals through leveraged buyouts, venture capital, distressed debt, and similar approaches. Additionally, investors might employ private equity outsourcing support during due diligence since significant performance insights are absent from publicly accessible media resources. 

Blackstone, Carlyle Group, Advent International, and Vista Equity Partners are a few globally recognized brands streamlining PE investments for stakeholders. Given the high-risk classification of PE investing opportunities, business owners and equity portfolio managers have identical incentives to maximize returns. 

Types of Private Equity Investments 

1| PE Fund of Funds 

A fund of funds (FOF) gathers capital from investors. Later, investors will want the FOF to invest in available PE opportunities. Simultaneously, investors benefit from a multi-strategy PE investing approach, distributing risk across growth capital, leveraged buyouts, and venture capital allocations. Investors and private sector players can utilize fund data solutions to assess a FOF’s past performances for informed wealth development decisions. 

Private equity FOF enables access to otherwise exclusive investment opportunities and robust diversification models. Aside from the time-tested skill set of financial professionals heading fund of fund operations, investors enjoy moderate liquidity. It is still less than public company investments but more than direct investments into unlisted businesses. 

FOFs in private equity investments can offer geographic, sectoral, and thematic scope of screening companies. Otherwise, investors can select a multi-strategy option that integrates the strengths of these three FOF categorizations. 

2| Distressed Debt 

Bankruptcy, restructuring, and similar financial challenges often prompt private companies to offer discounts to attract and retain investors. Distressed debt involves transactions involving investors purchasing high-risk corporate debt securities. Later, if the business successfully recovers from those financially troubling circumstances, investors enjoy additional gains because they receive remarkable discounts during the initial transactions. 

Active involvement is also vital, indicating investors must share their acquired wisdom of corporate restructuring and collaborate with domain experts to accelerate business value enrichment programs. Therefore, feasibility studies and performance reports are pivotal to reducing investment loss risks upon failed business revival attempts. 

3| Mezzanine Capital 

This hybrid approach to private equity investments offers a concentrated strategy relying on synergized equity and debt financing strengths. Mezzanine capital, beneficial in PE-driven fundraising, exhibits higher interest rates because it is secondary to senior debt. Senior debt in a private equity context ensures lenders get settlements upon liquidation or bankruptcy. 

In other words, Mezzanine capital is subordinated to senior debt in the enterprise capital structure and, therefore, riskier. However, its return-yielding potential is remarkable due to interest rates being higher than those of senior debt. Mezzanine capital in PE also features conversion rights or warrants, empowering lending investors to upgrade to standard equity when company performance improves after capital infusion. 

Conclusion 

Distressed debt and Mezzanine capital are the high-risk types of private equity investments. Meanwhile, a private equity fund of funds softens the risk exposure. After all, it delivers strategic diversification and exclusive access to unique PE investing opportunities. Regardless of a few slumps in the industry during 2019-20, private equity is essential to help unlisted companies overcome capacity and growth challenges while striking a balance of investor risks and returns.