Private equity offers companies alternative options for raising capital, engaging in acquisitions, and pursuing growth beyond what may be available through public markets alone. However, navigating the world of private equity requires understanding different investment structures, strategies, and opportunities. In this in-depth guide, we’ll explore how companies can explore private equity to meet their goals.
Venture Capital
Venture capital refers to equity investments made in early-stage startup companies in exchange for ownership stakes. For entrepreneurs seeking funding, venture capital may involve tapping angel investors or venture capital funds. Angel investors are high-net-worth individuals who provide seed-stage funding, often in exchange for 10-20% equity in startups. Venture funds raise capital from institutions and high-net-worth individuals then invest in startups through various stages in exchange for larger equity stakes.
The venture capital process involves business plan pitches to investors and undergoing rigorous due diligence on operations and financial forecasts. If approved, startups receive capital infusions in tranches contingent on hitting milestones. In successful exits, venture investors cash out through mergers or public offerings alongside founders and employees. Though dilutive to ownership, venture capital accelerates growth trajectories for innovative startups that may otherwise struggle to reach their potential.
Growth Equity
Growth equity refers to private investments made in later-stage private companies, often those generating positive cash flows but not yet large or mature enough for private buyouts. Compared to venture capital, growth equity transactions involve companies having proven business models and revenue streams but seeking infusions to scale more rapidly through product development, geographical expansion, acquisitions, and other initiatives.
Growth equity investments range from $10-100+ million. Investors may acquire minority equity stakes or occasionally control positions. Investees have more advanced operations but remain private companies reliant on continued private ownership to reach their ambitious goals. Reputable growth equity firms provide capital and operational expertise to transition companies most efficiently toward the buyout stage over three to seven years.
Leveraged Buyouts
Leveraged buyouts refer to acquisitions of either whole public or large private companies financed primarily through borrowed capital, with the acquired company’s assets used as collateral. Privat firms assemble capital pools from limited partners and then seek acquisition targets alongside management teams. Buyouts are often financed with 60-80% in debt plus new equity from the firm and reinvestment by acquired company management members.
Post-acquisition, private equity owners aim to improve operations and cash flows so acquired companies can service and repay added debt over 3-7 years. Often firms execute cost-cutting, restructuring, revenue-enhancing strategies, and add-on acquisitions. Successful buyouts are ultimately exited via sales to new financial or strategic acquirers or via IPOs that return strong profits to investors and management. This model rewards operational excellence and fuels further private equity investment.
Secondary Buyouts in Private Equity
Secondary buyouts involve acquisitions of existing portfolio companies from earlier private equity investors, as opposed to primary buyouts directly from public or founding shareholders. When looking to monetize prior equity stakes in stable companies, private equity firms may offer entire company sale processes to strategic and other financial sponsors, sparking competitive secondary buyouts.
These transactions provide ready-made companies with proven business models, revenues, positive cash flows, and stabilized infrastructure post-earlier private ownership phases. Secondary private equity buyers acquire control stakes and take advantage of existing operational momentum to oversee final scale-up and exit from further acquired ownership stakes. Secondary buyouts also recycle capital among private funds towards fresh investment opportunities.
Separate Accounts
Along with making fund investments, some large institutional investors establish separate account structures directly with equity firms. Under these customized arrangements, individual companies or pensions commit large capital pools to utilize a single private equity firm’s deal flow and pay lower management fees for a separately managed portfolio.
Separate accounts provide maximum optionality, control, and influence over the investment process at the cost of lesser pooling of risk relative to traditional blind-pool commingled funds. They suit investors seeking very large direct investment minimums and highly customized portfolio approaches managed by firms of their selection. Corporate separate accounts may directly acquire portfolio companies alongside PE sponsor firms as co-investors.
Direct Investments
Some large corporations with substantial capital resources bypass dependency on third-party private equity firms altogether through direct principal investments. These direct investments mirror approaches traditionally executed through private equity and involve companies directly providing growth capital, undergoing buyouts, and undertaking other transactions on their balance sheets.
Direct investment arms operate like internal private equity divisions staffed by experienced investment professionals. They support corporate strategies around business expansion, synergistic add-ons, and new market entries. Profits accrue directly back to corporate parent balance sheets. Direct private equity programs allow large companies flexible participation in attractive deals without paying sponsor fees or ceding influence and information to external partners.
Primary Advantages of Private Equity
Private equity provides companies with versatile funding channels beyond public markets. Whether tapping venture capital as startups, utilizing growth equity for accelerating expansion, undertaking buyouts, executing secondary deals, or establishing direct investment programs – private capital opens major opportunities. Private companies maintain long-term ownership independence. For investors and acquirers, private equity fuels both financial returns and strategic objectives through operational oversight of portfolio assets. With diligent planning and partner selection, companies can engineer private capital to fuel growth on favorable terms.
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