Private equity investments are not new; in fact, it has been in existence for almost a century and was the domain of wealthy individuals and families. Some of the most famous families like the Wallenbergs, Vanderbilts, Whitneys, Rockefellers, and Warburgs could be termed as pioneer venture capitalists. For example, Laurance S. Rockefeller helped finance the creation of both Eastern Air Lines and Douglas Aircraft in 1938. Eric M. Warburg founded E.M. Warburg & Co. in 1938, which was the forerunner to the current entity of Warburg Pincus, one of the most significant private equity funds with investments in both leveraged buyouts and venture capital.
Key differences between private equity and venture capital
Private equity firms aim at occupying a major chunk. They usually buy 100% ownership of the companies in which they are investing. Therefore, the companies are in total control of the firm after the buyout. They can take major as well as small decisions for the company. Venture capital companies invest in 49% or less of the equity of the firms. Most VC firms prefer to distribute their risk and invest in many diverse companies. Hence, even if one startup fails, the entire finance in the venture capital firm is not substantially affected. Private equity firms invest huge amounts of capital in a single company. These companies prefer to focus all their efforts on a single company since they invest in matured and already established companies. The probability of absolute losses from such a type of investment is minimal. Venture capitalists spend comparatively less on each company since they mainly deal with startups with unpredictable chances of success or failure.
Private Equity (PE) are those investments, that are made in companies that are not listed publicly on any stock exchange. In simple terms, private equity refers to investment in shares outside a stock exchange. Retail investors or institutions give specific company funds, and in return buy part of that particular company. This is done to invest in private companies or acquire public companies. The funds received are generally used in the expansion of business, acquisitions, or for strengthening the balance sheet of a firm. The most regular kinds of private equity are growth capital, distressed investments, mezzanine capital, and leveraged buyouts. Private equity companies purchase an already established firm and restructure it to develop furthermore. They concentrate on expansion activities and focus on making it better than before. The targeted company should shine way better than it previously would, only then the advantage of doing a PE is experienced.
What is venture capital?
Venture Capital refers to the financing of small companies or businesses by investors who seek high potential growth. When capital is invested in a project, where substantial element risk is involved, generally in a new or expanding company, it is called as venture capital. Every startup required a potential amount of funds to grow. So normally, high-wealth investors who think or believe that the business has the potential to grow significantly in the long term, finance a startup company. They see it from a broader and long term perspective. Generally, only a particular percentage is invested in startup companies by the venture capitalist, the one who invests venture capital. This capital can be contributed by individuals or investors to startup firms or small enterprises which offer promising prospects and have a fresh innovative concept. In the case of new private companies, who are not able to raise funds from the public, they can plump for venture capital. This type of financing may involve a high extent of risk and whose promoters are qualified and young entrepreneurs. They require capital assistance and funding for turning their ideas into reality. Venture capital companies support the growing firms in their early stage before they make an offer publicly. The financier is called Venture Capitalist, and the capital is given as equity capital. The VC funding is related to huge initial capital investment business or sunrise segments such as information technology. The return factor and risk in such a type of funding are comparatively higher.
In the past decade or so, private equity and venture capital, as asset classes, have been converging in some respects. As venture capital invests greater capital the industry is starting to look more like private equity, and vice versa. Venture capitalists are rethinking their risky strategies by investing more in late stage companies, which promise more growth. Meanwhile, private equity’s record-breaking amounts of capital need more places to go, and tech – though typically the sector-of-choice for venture capitalists – seems to be a promising area for returns. This means that more private equity investors are seeking companies that are not quite as mature. As the global markets evolve, as the economy changes, and as investors reevaluate their tolerance for risk, private equity and venture capital will continue to change.