Private equity firms operate the asset class of private equity to purchase and manage assets before selling them for profit. They may acquire public or private companies entirely or invest in a part of them. Often grouped with hedge and venture capital funds, investors invest their capital in these for a few years and then wait for profits.
Companies with high growth potential gain the attention of most private equity investors. Investors hire private equity solutions to identify the best companies to maximize profit.
Read on to learn more about the various forms of private equity investments:
1. LBO (Leveraged Buyout)
A leveraged buyout is a fund strategy combining borrowed money with investment funds to buy a company and make it profitable. If the plan succeeds, it could bring larger profits for the investors. Now that the fund managers get more money to buy bigger companies, they can purchase a company outright or buy a majority stake to control its functioning.
2. Venture Capital (VC)
Venture capital involves funding new businesses and early-stage startups with high growth potential. Investors often invest in startups that have captured the market quickly and are ready for expansion. Venture capitalists often get a minority stake in the companies, leaving the business control to its original owners. Most investors perceive this strategy as risky due to the company’s inexperience and limited funds. Investors also provide their managerial and technical expertise and money.
3. Growth Equity
Companies planning for expansion raise funds through growth equity. Similar to VC but less speculative than the latter, investors invest in already profitable companies with minimal or no debt and high valuation. Successful companies planning to buy other companies or enter new markets raise capital through growth equity. Private equity solutions help investors identify companies with high returns but medium risk.
4. Infrastructure Equity
In this type of private equity, companies raise PE capital to purchase assets, manage them, and eventually profit by selling them. It includes investments in companies that provide essential services and utilities, like gas, water, electricity, transportation, energy, and social infrastructure. These companies have stability and have operated for years. Many have monopolies, making them incredibly profitable with lower risk.
5. Fund of Funds
Fund of funds gathers capital from PE investors but does not invest it in private assets or companies. Instead, it purchases the portfolio of other PE funds as an investor, such as leveraged buyout, VC company, or real estate PE firm. Investors benefit from diversification by entering into niche funds with higher returns. Investors for these PE funds are often pension funds, high-net-worth individuals, endowments, and accredited investors.
Private equity funds are alternative investment opportunities for diversified income sources. Knowing how a business performs helps investors make informed decisions for their capital with assured profit. Private equity solutions generate financial statements, track owner’s equity, and provide reliable and current information, giving investors real insights into a company’s ongoing profitability and value.
