We live in an unstable financial world. This has meant that those seeking to invest are desperate to know where they can find a safe bet. As a result, interest in the different types of private equity (PE) has gone up.
Private equity is an investment made by funds who are not listed on the public stock exchange. Companies use the funds for a range of different things but the end goal is the same for any investor, a return on investment.
So how many different types of private equity are there?
Let us show you and after reading you will see that there isn’t an area of business that doesn’t benefit from the various types of private equity.
Made famous with the tech boom of the late ’90s, venture capital funds invest in start-up, emerging, or small businesses. This is done with the hope of a return on investment should the company become successful.
There is a clear risk in doing this as these companies don’t have a solid track record of turning a profit. However, the potential sizable windfall has made them very lucrative.
Young companies on the market for the support of venture capital fall into two categories.
Early-stage funds focus on looking for budding enterprises with extremely capable leaders looking for capital to develop technologies etc. Later stage funds for emerging businesses that may have already exhibited a profitable business plan and may be looking to expand or step into new markets.
Examples: Whatsapp and Facebook started life being funded by VC’s.
A leveraged buy-out is when a PE fund uses part of its capital as well as borrowed funds to acquire a controlling stake in a company.
Operating similarly to a mortgage, capital is raised (up to 90% through loans) and the existing debt is offset by any profits gained by the company purchased plus any existing assets that they may have.
The goal of any PF fund who performs a leveraged buyout is to stimulate the profitability of the newly acquired business. To do this they will reduce expenses or change their financial strategy via financial engineering.
Mature, profitable businesses are prime candidates for LBOs due to the high levels of debt that are involved.
Examples: Heathrow Airport, Manchester United and Hilton Hotels are some famous examples that have been involved in LBO’s in recent history.
As a comparison, a management buyout is a form of acquisition in which a company’s existing management acquires most or all of the company from its parent company or non-artificial person.
At times a company may wish to expand or step into new markets in a way that they feel will be profitable long term. To do so however they need the money that they don’t have. In this case, a PE firm can choose to invest to stimulate this growth, which is the basis for Growth Capital.
Companies in this position are usually stable and financially secure. This means that although similar to VC, investors take minority stakes and leave the day to day running of operations to the business.
Growth capital funds are willing to invest in businesses that they see as reliable and profitable, even if at times the company in question doesn’t have a long track record. This means that they sit in the middle of VC’s who look for new blood and LBO’s who need a sure bet.
Examples: Deliveroo is seeking to benefit from $180 billion received due to growth capital.
Investing in real estate is perhaps one of the most well-established types of private equity. This is likely due to the constant and steady cash flow investors enjoy over time as well as the potential of high returns.
Commercial real estate is where most of the investment goes. This includes such things as office blocks, shopping centres, multi-family apartment buildings. Other areas such as land are also included however this is more speculative and therefore seen as more of a risk.
Investing in real estate on this scale in the past has only been open to high net with individuals or institutional investors. The reason? The large amounts needed to contribute.
Examples: Blackrock is the biggest private equity firm in this sector with properties as diverse as the MGM Grand and Bellagio in Las Vegas to Center Parks in the UK.
Investing in infrastructure involves three main areas of investment, utilities, social and transportation.
Utilities include investing in the energy sector, water distribution and telecommunications. Social investments involve education facilities and hospitals and transportation can include toll roads, rail and airports.
Why are these types of private equity desirable?
Well as they are providing essential services, even though there is not much room for potential growth, it is a low-risk investment. This means you as an investor can rely upon steady and stable returns.
Additionally, infrastructure funds allow more flexibility in where your money lies, meaning it is better protected in an often volatile market.
Distressed Private Equity
More and more on the news, we hear of companies facing hard times being bailed out at the last minute by private investors.
These types of private equity are known as distressed private equity.
Getting involved in distressed private equity will require a wide range of skills on the behalf of the private equity fund involved. Not only the standard business acumen is necessary but an understanding of bankruptcy laws and capital and credit structure among other areas of expertise may be called upon.
So why would someone choose to invest in a company going through major difficulties?
Mainly because the purchase value becomes so low that they can make a massive profit from turning fortunes around. Any future sale or even going public can make distressed private equity extremely lucrative.
Examples: The trainer brand Converse filed for bankruptcy at the turn of the millennium and was saved by Footwear Aquisition Inc for $117.5 million. They later sold it to Nike in 2003 for $305 million.
Clarity on the Different Types of Private Equity
Deciding where to invest your money, is one of the decisions in life that can have the most ramifications for you or your clients future.
For that reason, we hope that this deep dive into the different types of private equity has left you with a clear idea about the available options.
If you would like further advice or you have a question that needs answering don’t hesitate to contact us!0