Private equity is used to broadly group funds and investment companies that provide capital on a negotiated basis generally to private businesses and primarily in the form of equity (ie stock). This category of firms is a superset that includes venture capital, buyout-also called leveraged buyout (LBO) -mezzanine, and growth equity or expansion funds. The industry expertise, amount invested, transaction structure preference, and return expectations vary according to the mission of each.
Venture capital is one of the most misused financing terms, attempting to lump many perceived private investors into one category. In reality, very few companies receive funding from venture capitalists-not because they are not good companies, but primarily because they do not fit the funding model and objectives. One venture capitalist commented that his firm received hundreds of business plans a month, reviewed only a few of them, and invested in maybe one-and this was a large fund; this ratio of plan acceptance to plans submitted is common. Venture capital is primarily invested in young companies with significant growth potential. Industry focus is usually in technology or life sciences, though large investments have been made in recent years in certain types of service companies. Most venture investments fall into one of the following segments:
· Business Products and Services
· Computers and Peripherals
· Consumer Products and Services
· Electronics / Instrumentation
· Financial Services
· Healthcare Services
· Industrial / Energy
· IT Services
· Media and Entertainment
· Medical Devices and Equipment
· Networking and Equipment
· Retailing / Distribution
As venture capital funds have grown in size, the amount of capital to be deployed per deal has increased, driving their investments into later stages … and now overlapping investments more traditionally made by growth equity investors.
Like venture capital funds, growth equity funds are typically limited partnerships financed by institutional and high net worth investors. Each are minority investors (at least in concept); though in reality both make their investments in a form with terms and conditions that give them effective control of the portfolio company regardless of the percentage owned. As a percent of the total private equity universe, growth equity funds represent a small portion of the population.
The main difference between venture capital and growth equity investors is their risk profile and investment strategy. Unlike venture capital fund strategies, growth equity investors do not plan on portfolio companies to fail, so their return expectations per company can be more measured. Venture funds plan on failed investments and must off-set their losses with significant gains in their other investments. A result of this strategy, venture capitalists need each portfolio company to have the potential for an enterprise exit valuation of at least several hundred million dollars if the company succeeds. This return criterion significantly limits the companies that make it through the opportunity filter of venture capital funds.
Another significant difference between growth equity investors and venture capitalist is that they will invest in more traditional industry sectors like manufacturing, distribution and business services. Lastly, growth equity investors may consider transactions enabling some capital to be used to fund partner buyouts or some liquidity for existing shareholders; this is almost never the case with traditional venture capital.