Types of Private Equity Firms and Funds
Private equity (PE) is a type of capital investment made in non-publicly traded firms. In most cases, PE firms only accept accredited or high-net-worth investors. Private equity companies owned around $3.9 trillion in assets in 2019, up 12.2 percent from the previous year. Investors seek private equity funds in order to obtain higher returns than those available in public stock markets.
Institutional investors, such as pension funds, and big private equity companies supported by accredited investors make up the private equity industry. Because private equity includes direct investment — often to acquire influence or control over a company’s operations — it necessitates a large cash outlay, which is why the market is dominated by firms with big resources. Depending on the firm and fund, accredited investors may be required to contribute a minimum amount. Some funds need a minimum investment of $250,000, while others might require millions of dollars.
Private equity companies have a variety of fee structures, but most include a management and performance fee. Although incentive structures can range significantly, an annual management fee of 2 percent of assets and 20 percent of profits (including tax) upon sale of the company is common.
The investing preferences of private equity firms are diverse. Some act strictly as financiers or passive investors, relying on management to expand the company and produce profits. Other firms take an active approach to investing; these investors give operational assistance to management in order to help the company expand and grow. A categorical difference can be drawn on this basis.
Venture capital and buyout funds and leveraged buyout funds are the two most common types of private equity fund. Small, early-stage, and developing companies that are believed to have significant development potential but have limited access to other types of funding are generally the focus of venture capital funds. VC funds are an important source of funding for tiny start-ups with ambitious value propositions and ideas that do not have access to huge amounts of debt. From the perspective of an investor, venture capital funds may yield spectacular profits despite the dangers of investing in unproven young firms.
The term “venture capitalist,” which refers to an investor in venture capital firms, applies not just to individuals, but also to businesses. For example, Google engages in venture capitalism through its Google Ventures division.
Leveraged buyout funds, in contrast to venture capital funds, invest in more-established firms and typically take a controlling position. To boost their rate of return, LBO funds utilize large amounts of borrowed money. Compared to venture capital funds, buyout funds are often much bigger. They are frequently used by private equity firms to acquire a company and then sell it for a profit. Gibson Greeting Cards is a good example of a well-executed LBO.
Gibson Greeting Cards was purchased by Wesray Capital for $80 million in 1982. The purchase was funded with $1 million in cash as well as through the sale of junk bonds. After 18 months, Wesray sold Gibson Greeting Cards for $220 million, with investors gaining almost 200 times their initial investment.
