Private equity is an alternative class of investment. It is an alternative investment class not listed on the public exchange. This means private equity comes from funds raised directly by private investors or investment groups. A conglomerate may convert Public companies’ equity into private capital. Private equity funds are divided into several categories, each with structure, strategy, and core purpose. Let’s look at the different types of pe fund structure.
What are Private Equity Funds?
Private equity funds are a combination of assets which invest in corporate bonds and securities. A corporation or partnership often manages them. With yearly growth options, such investments can range from five to ten years. Private equity funds are distinguished because they do not trade on the stock exchange or allow anyone to register their capital.
Types of Private Equity Funds
Private equity is divided into broad categories based on where the investment is made in the life cycle of the company:
1. Venture Capital (VC)
Venture Capital is an early-stage financing and private equity firm that funds startups and new companies. Venture capitalists are interested in investing in businesses with high growth potential. They also invest in increasing startups with the potential for further expansion.
Venture capital funds are generally a smaller stake than leveraged buyouts. The control of the company is left in the hands of the management. Venture capital investing is riskier because these companies are brand new and need a track record for making money. This type of financing is generally created and managed by venture capital firms. Most investment comes from wealthy investors, angel investors, investment banking, and other financial institutions. Sometimes, investors only contribute money and offers of managerial or technical expertise are accepted.
2. Growth Capital (GC)
Growth Capital, Private Equity funds invest in established businesses with a larger size and a functioning infrastructure and operations. The funds are used to fund an acquisition, restructure the business model, and gain access to new industries or markets. The amount these companies invest is usually tiny, as they have good earnings and are profitable but need help to use their existing assets to get financing.
3. Leveraged buyout (LBO)
Leveraged buyout funds combine investment money with borrowed cash. The fund aims to purchase companies and turn them into profitable businesses. The fund manager can buy more companies by combining borrowed and investor money. These deals are made when companies are purchased outright, or the buyer takes a majority share in the company to control the strategy and direction.
A leveraged buyout is called so because the company buying out the other company uses investors’ and creditors’ money to make a more significant purchase. If the strategies work, investors could see higher returns if they invest in larger buyouts.
4. Mezzanine Capital
Mezzanine capital is a combination of private equity and debt financing. When a company seeks Mezzanine capital, it takes out a loan and gives some equity to the investor in exchange for the capital received. Investors can decide to convert the investor’s debt into equity in the company. Conversions are usually made in cases of default. Mezzanine capital is usually a good match for companies in later stages. Companies that need money for a short-term growth project, such as an acquisition, seek this type of PE investment. Investors are at a moderate risk because the worst-case scenario is that they own more than the company rather than not receiving their investment.
5. Real Estate
Private equity real estate firms raise capital to develop, acquire, operate, and sell buildings to provide a return to their investors. Real estate private equity firms are similar to the general private equity industry in that they raise capital from Limited Partners, which include pension funds, insurance companies, and university endowments. Real estate funds are invested in real estate. These funds use the following strategies:
- · Core: Cash flow that is predictable with low-risk/low-return strategies.
- · Core Plus: Investing in risk/return strategies that are modern and modern in core properties.
- · Value Added: The value-added strategy applies to properties with some physical issues that require improvement. The approach involves investing in a medium-high risk/medium to high return investment in which the property is bought to be improved and sold again.
- · Opportunistic Investment: A high-risk/high-return strategy is used in properties that require many improvements.
6. Fund of Funds
A private equity fund of funds raises capital through investors but does not invest in personal assets or companies. It acts as an investment and purchases a portfolio of other private equity funds. A fund-of-funds company will support, for example, a venture capital firm, real estate private equity, or leveraged buyout funds. Professional investors manage the funds and charge a fee for their management.
Diversification is a benefit that investors can enjoy with this type of fund. This type of fund also gives investors access to funds they might not have otherwise been able to invest in. Fund of Funds is a popular way to invest in private equity funds. It also gives investors access to niche funds with higher returns: pension funds, accredited inverse, endowments, and individuals generally with high net worth.
Conclusion
Private investment funds pool the capital of accredited investors or institutions to invest in various assets. These investments offer high potential returns, professional management and the chance to diversify beyond traditional investment.
Private investment funds allow investors to access alternative assets and benefit from professional management. They can also earn higher returns. These funds are governed by different regulations than public funds, and they often have limited liquidity.