What Is Private Equity?

Private equity consists of equity securities in operating companies that are not publicly traded on a stock exchange. Investments in private equity from an investors view involve either an investment of capital into an operating company or the acquisition of an operating company.

Returns on private equity occur in three ways: a merger or sale, an initial public offering, or a recapitalization. Among the most common investment strategies in private equity include leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital. Distinct from a venture capital or growth capital investment, a private equity buyout involves purchasing majority control of an existing well established firm.

With private equity investments there is no marketplace, so an investor has to research and find willing sellers of a business. Private equity is strictly regulated and highly illiquid because sellers of private stocks must first locate willing buyers.

What is Venture Capital?

Venture capital investment is a type of private equity capital typically provided to early-stage, high-potential, and high-growth companies in the interest of generating a return. Venture capital investments are generally made as cash in exchange for shares in the invested company.

Venture capital investor’s work with various markets and venture capital firms and companies are typically institutional investors and high net worth individuals. Venture Capital funds are pooled together by dedicated investment firms, and then invested into industries.

Venture capital firms typically comprise small teams with technology backgrounds or those with business training or deep industry experience. Venture Capital Investment requires strong research and analysis and a venture capitalist will often take a role in managing entrepreneurial companies at an early stage, adding years of business expertise skill to help a growing venture.

An entrepreneur seeking venture capital is typically a new company with limited operating history that is too small to raise capital in the public markets and is too immature to secure a bank loan or complete a debt offering. The disadvantage for the venture owner is that a venture capitalist company will have significant control over the company.

Angel Investors

An angel investor is an individual private investor, or a network of investors who invest capital directly into small and medium sized businesses. Angel Investors have varied motivation for investing in small and medium sized businesses but all seek viable returns from the businesses they invest in.

Angel investment typically consists of a private investor or network that has a strong business acumen and high net-worth. Angels Investors typically invest their own funds, unlike venture capitalists, who manage the pooled money of others in a professionally-managed fund.

A trend which has been increasing lately is angel investors who organize themselves into angel groups or angel networks to share research and pool their investment capital. Common in the United Kingdom these group can be found through networks and forums and similar to Venture Capitalist’s, provide business knowledge as well as investment capital.