Finance

Key types of private equity strategies

private equity strategies

What is private equity?

Private equity is considered to be a form of alternative investing, meaning that it contrasts traditional investing in stocks and bonds. It is a term that refers to any type of equity investment in an asset where the equity is not freely tradable on a public stock market. Is less liquid than publicly traded stocks and is considered a long-term investment. These organizations allocate investment money from high-net-worth individuals, insurance companies, mutual funds, pensions, or any other institutional investors. Some examples for private equity firms include The Carlyle Group, Kohlberg Kravis Roberts, and Co.

Types of private equity strategies

Buyouts, growth equity, and venture capital are the three types of private equity strategies; they do not compete against one another and require different kinds of skills to be successful. Let us have a closer look at each private equity strategy to have a deep understanding while building portfolios:

Buyouts

Buyouts usually occur when a mature, usually public company is going private. Typically, a public firm is taken private and bought by an existing private company or its existing management team. These equities form a large portion of funds in the private equity space. When a buyout occurs, all of the organization’s previous investors sell their shares to receive cash and exit. The management team or private equity firm becomes a sole investor and holds a controlling share of the organization, usually over 50 percent. Buyouts can be of two types:

Management buyouts

Here, the existing management team purchases the company’s assets and takes on controlling shares. These buyouts are good for public companies that need internal restructuring and want to be private firms before embarking on company changes.

Leveraged buyouts

These buyouts are funded with borrowed money. And is suitable for companies that wish to make major acquisitions without spending excess capital.

Growth equity

This is the second type of private equity strategy; it is capital investment in a growing and established company. Firms that are established but require additional funding during their lifecycle are where growth equity comes into play. Any investment is bound to have risks but in the case of growth equity, the organizations have a chance to prove that it is capable to provide returns before being bought out by the private equity firm.

In the private equity industry, many firms who are into growth equity make sure that they maintain a database of up-and-coming organizations and keep track of their financial information, sometimes as long as 15 years. This is important so that firms can flag organizations’ growth. And earning revenue at a fast clip and then reaching out to them. When they required additional funding for further expansion.

Venture capital

This is a type of investment in the private equity industry made in an early-stage startup. It is a risk for these firms usually to invest in venture capital since these startups do not prove it. Their ability to turn a profit and their return on investment is never a guarantee. However, potentially, venture capitalists can cash in on billions of dollars when these startups turn out to be the next big thing. For example- Uber was able to raise a staggering USD 1.5 billion in venture capital funding and was able to raise USD 258 million from Google Ventures.

 

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