There seems to have been a little bit of confusion amongst many of you recently when we touched on the topic of business investment, and in particular on the themes of private equity and venture capital. Many of you were under the impression that these two investment vehicles are the same thing with different names, but that isn’t strictly true. To help us clear this up we have the wonderful Tyler T. Tysdal with us, a man who has been an investor, a fund manager and an investment analyst throughout his career. Tyler concedes that these two funds appear similar, but here is what splits them apart.
Private equity is an investment vehicle which seeks to invest in companies which require additional funding or businesses which are struggling. Generally these will be companies that are not listed on the stock exchange. Private equity funds will look to take 100% control of a business, restructure it, sell off assets, streamline the workforce and then sell the business for a profit, sharing the wealth between investors. To give an example, company A is struggling and so the private equity group looks to make a leveraged buyout of $9 billion, $2 billion coming from the fun, and $7 million borrowed from the bank. The private equity fund will replace the management team, and look at making improvements to the business. Two years later things are improving and the company is sold during a bull market for $11 billion. The loan is repaid and the fund is left with $2 billion in profit which is then shared between investors.
Venture capital is an investment vehicle which solely focuses on young companies in growth industries. The VC will buy a stake of the company, almost always less than 49%, and then it will use its experience and finances to impact opportunities and do all that they can to help the young business succeed. A venture capital is a riskier fund which looks to invest in companies which have very low value, in the hope that the business thrives and the value of their share in the company will increasingly rise, the stake will be sold off and funds shared between investors, or the VC may simply pay out dividends based on the rising value of the business.
The key differences between these funds are the risk level, with VC being a much riskier strategy, business types, stage of investment, the ownership stake and the amount of input which the fund must make. Another key difference is the type of companies that are invested in by each fund, we can see in the case of venture capital that this is always in young businesses in the early stages, whereas private equity deals only with business which have a long history.
Hopefully this clears up the confusion around
the two different investment funds, any more questions feel free to give us a