Private equity (PE funds) and Venture Capital (VC funds) raise capital from outside investors called Limited Partners (LPs) – pension funds, insurance companies and wealthy private clients. Both funds then invest capital in private companies or companies that go private and try to sell their investments at higher prices in the future 5 to 10 years later.
The Difference between Private Equity and Venture Capital
There are significant differences between the way Private equity funds and Venture Capital funds do business. These differences are as follows:
– The level of maturity of the investment. VC firms typically invest in startups or emerging businesses to increase their initial value. VC funds typically invest in technology and biotechnology companies. PE funds invest in more mature businesses, and then use their expertise to try to improve the quality of the company’s management and operational efficiency to increase the company’s income.
– Investment selection criteria. A VC fund looks for a fully experienced management team that can be trusted to build a high quality business. PE fund is looking for undervalued assets (rather than a strong team) that can be monetized more effectively with in-house expertise.
– Size of investment, share. Venture Capital firms typically buy a relatively small, non-controlling stake in a company. They rely on the existing management team to make the global decisions necessary to increase business value. PE funds typically purchase the entire company to ensure full control of the organization’s business operations and financing.
– Share of investment in the portfolio. Venture capital funds limit their investments to a single project because each startup is at high risk of failure. Conversely, Private Equity funds may invest a significant portion of their assets in acquiring a company on the grounds that larger, more established companies in the sector are unlikely to go bankrupt.
– Capital. Venture Capital funds acquire a stake in a startup with their own capital. PE funds raise debt (about 80-90%) to acquire the company, thus only 10-20% of their own capital. Therefore, for Private Equity funds are characterized by investing in companies with a stable positive free cash flow. Its allows them to finance a high debt burden and meet obligations.
– Diversification. VC funds widely diversify their investments among a variety of projects, so that the failure of a few investments is offset by gains in other startups. Private Equity funds tend to focus their funds on a limited number of companies that they can closely monitor.
– Expected returns. Venture capital firms need 1 or 2 projects to be the most successful. This can offset the likely losses of the other projects. Private Equity funds expect a steady return on each of their investments. They an active role in managing the business and operations of the entire company.
CONCLUSIONS
The only thing Private Equity and Venture Capital funds have in common is that they have the capital to invest – in all other respects their paths to profit are completely divergent.
You can find Venture Capital, Private Equity funds or startups on our website: Parsers VC
