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Alternative Investment Fund Overview of Private Equity and Venture Capital

Private equity (PE) is private capital raised by a corporation, i.e. not raised on a public market ranging from providing finances to start-ups to the purchase of large and mature companies. Private equity includes several investment sectors and strategies such as venture capital, leverage buyouts, mezzanine financing, fund of funds, infrastructure, distressed debt and so on. Venture capital (VC) is a subset and an essential part of value creation in the whole private equity financing cycle. VC investment is focused mostly on the start-ups with high growth potential. All in all, Private Equity and Venture Capital is a simple business – acquire a minority or majority stake in a company, improve the business, and sell the business with high exit multiple. Some key differences between PE and VC firms are listed below:

Differences:

1. Stage:

a. PE Firms usually buy companies that are mature, have history of positive cash flows,
but are on the downturn due to inefficient management.  PE firms are believed to
have required resources to stop value leakage, streamline operations, and improve
earnings.

b. VC firms bet on the future growth of early-stage companies which are pre-profit,
often pre-revenue and sometimes pre-product start-ups. These companies have
massive growth potential but lack funding to take their ideas/business forward.

 

1. Company Types:
a. PE investment are made on several kind of industries and do not have any specific focus.
b. While VC investment have flexibility to invest in any kind of industries, they invest heavily on
technology and health sector.

 

1. Amount of Capital Invested per deal:
a. Often times, the amount invested per deal is higher for PE firms than VC firms.  As a result,
PE firms typically have more concentrated portfolio of companies.

 

1. Company Types:
a. PE investment are made on several kind of industries and do not have any specific focus.
b. While VC investment have flexibility to invest in any kind of industries, they invest heavily on
technology and health sector.

 

1. Amount of Capital Invested per deal:
a. Often times, the amount invested per deal is higher for PE firms than VC firms.  As a result,
PE firms typically have more concentrated portfolio of companies.

Author: Achyut Gautam

Achyut is a financial strategist at Invest and Infra and is a CFA level III candidate. Prior to this
appointment, Achyut was the project manager at ACORD Corporation, New York where he worked to
leverage and implement global insurance standards across insurance markets in the US, London,
Japan, and other A-PAC countries. He holds an undergraduate degree in Finance from Ramapo
College of New Jersey, USA.

Author: achyut gautam

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