The private equity (PE) industry is comprised of institutional investors such as pension funds, and large private-equity (PE) firms funded by accredited investors. Because private equity (PE) entails direct investment—often to gain influence or control over a company’s operations—a significant capital outlay is required, which is why funds with deep pockets dominate the industry.
There are several subsets of private equity including:
- Venture capital, which focuses on investing in privately-held, young, fast growing companies
- Buyout investing
- Recapitalizations, and
- Mezzanine investing
While they both source their funds from the same neighbourhood, private equity is quite different from venture capital in 4 distinct ways.
First, unlike venture capital funds which invest in young and high-risk start-up businesses, private equity typically targets growing and mature companies that are already established, or becoming established, in the market.
The second key difference is that private equity funds usually acquire a majority ownership and controlling interest in most of the companies they invest in. These are typically known as ‘buyouts’ and they make up a big chunk of private equity deals worldwide.
The third major difference with private equity is the amount of money they invest in deals. While venture capital firms may invest a few million dollars in several businesses, private equity firm may more than $100 million in a single company.
The fourth key difference is that while venture capital firms typically focus on risky but high-growth industries like technology, private equity are often industry-agnostic and can buy companies from any industry as long as they meet their selection criteria such as hotel, restaurant, manufacturing etc.
- Large Amounts of Funding – The impact of that kind of money on a company can be massive.
- Active Involvement – Private equity firms are much more hands on in running your business and can bring a lot of value.
- Private equity firms have a lot more at stake – In addition to investor’s funding, they often also borrow a lot of money to make their investments and will do everything it takes to make your business successful.
- Individual partners in the private equity firm often have their own money invested as well, and make additional money from performance fees if they make a profit, so they have strong personal incentives to increase your company’s value.
- You must have a high-growth or mature business to attract private equity investors
- Private equity firms often demand a majority stake, and sometimes you’ll be left with little or nothing of your ownership.
- Beyond the money, you can also lose control of the direction of your business. The private equity firm will want to be actively involved, and as we mentioned in the previous section, that can be a good thing. But it can also mean losing control of basic elements of your business like setting strategy, hiring and firing employees, and choosing the management team.