Types of Private Equity Investments
Private equity (PE) investments attract investors while empowering the corporate world to acquire more funds. However, gathering business intelligence about companies not listed on stock exchanges is crucial to benefiting from private equity. This post will explore the types of private equity investments that enhance investors’ portfolios.
What Are Private Equity Investments?
PE investments seek and enrich businesses using investing partners’ capital, domain expertise, and adequate performance improvement strategies. Since companies are not public, finding comprehensive data during company screening is more challenging than equity research. So, investors find reliable private equity outsourcing support to get portfolio improvement ideas and due diligence per deal.
Venture capital (VC) and leveraged buyouts are two recognized PE categories. Many brands in real estate, technology, and energy industries, including startups, want to raise funds using those investments. The institutional investors in PE include pension funds and endowments. Finally, all private equity companies prioritize privatizing public companies, enriching current business metrics, and selling the investments to others after a while.
Types of Private Equity Investments
1| Venture Capital
Venture capitalists select multiple early-stage startups to outperform the public market’s returns. They rely on successful startups’ exponential growth potential. VC funds involve securing a minority stake, and this strategy facilitates company management autonomy. Unlike investment banking support concerning established brands and institutions, venture capital supports budding businesses and has high-risk exposure.
Angel investors and financial institutions contribute to VC funds. Additionally, venture capitalists can provide rich guidance to help startups enhance their business development strategies. This trend is most noticeable across tech and real estate VC-powered corporations.
The example of Sequoia’s WhatsApp returns, where the 60 million USD invested increased to 3 billion upon Facebook’s acquisition, continues to inspire venture capitalists. Therefore, VC funds continue to empower many startups despite several new companies’ early closures. Venture capital is perhaps the most intriguing case of “high risk, high rewards.”
2| Leveraged Buyout
A leveraged buyout (LBO) fund utilizes the strategic combinations of investment funds with capital borrowed from financial institutions. Later, this fund will buy companies with a vision to make them more efficient and profitable. The acquired credit increases fund managers’ ability to buy stakes into more powerful companies.
LBO-assisted private equity investments can involve complete takeover or majority stake deals with extensive directorial rights. In the latter case, stakeholders can revise a company’s strategies, like greenlighting aggressive cost-cutting plans. So they can drive sweeping business transformation.
While the debt burden might initially increase, investing in more giant corporations implies more remarkable gains. Nevertheless, leveraged buyouts necessitate exceptional managerial skills and favorable external variables. For instance, highly-reputed KKR, Goldman Sachs, and TPG Capital acquired TXU, a Texan energy enterprise. It relied on coal and nuclear for power generation, and the deal was for 45 billion USD. Still, financial crises and decreased gas prices forced resulted in TXU’s bankruptcy.
Related PE Investment Subcategories
Growth equity investments are less speculative than venture capital, preferring already profitable low-debt businesses. Their focus on established companies exploring market entry into a new demographic or experimenting with unique product ideas provides medium risk. Therefore, growth equity capital is a safer yet VC-like approach.
Fund of funds pool capital to benefit from other private equity investments by fulfilling an investor’s role. As a result, investors can increase resilience through professionally supervised diversification. Besides, individual investors can access a fund requiring more capital contributions.
Conclusion
You can categorize private equity investments based on the types of industries involving the portfolio companies. Similarly, PE classifications, like mezzanine capital, are more suitable for project-specific fundraisers.
Risk reduction strategies often encourage more stakeholders to explore private equity opportunities. Consider real estate private equity or REPE. It offers predictable returns by dedicating fund resources to residential rental properties. However, REPE can yield high gains for commercial foundation-to-completion projects.
Although PE funds are alternative investment methods, they can increase returns and help beat the market. At the same time, you want to ensure your private equity attitudes and risk exposure are acceptable. Macro forces can hurt PE more severely. Understandably, leaders, high net-worth individuals (HNWIs), and institutional investors collaborate with experienced private equity analysts for adequate risk assessments.
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