In the dynamic landscape of finance, private equity (PE) is an effective tool for growth, innovation, and large profits. But what exactly is private equity, and what types of investments does it cover? Here, we have covered various types of private equity investments so that you may have complete knowledge that would help you to make wise decisions.
What is Private Equity?
Private equity is capital investment made into non-publicly traded firms. These long-term investments are characterized by their long-term focus and are usually aimed at organizations with great growth potential. The business wants to increase its value over time and sell it profitably. Preqin’s 2020 research shows that the worldwide private equity sector controlled assets valued at more than $4.5 trillion, therefore highlighting its great impact and reach.
Different Types of Private Equity
Knowing the different types of private equity investments can widen your portfolio and help you make suitable decisions. Here are the various other types of private equity investment.
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Buyouts
Buyouts involve acquiring a company’s controlling share, often funded by a mix of debt and equity. In order to raise the value of the business, private equity fund structure seek to improve operational efficiencies, restructure management, and implement strategic changes. The leveraged buyout (LBO) is a common type of buyout in which borrowed money pays for a large amount of the purchase cost. For instance, the acquisition of Dell Technologies by Michael Dell and Silver Lake Partners in 2013 for approximately $24.9 billion is a classic example of an LBO.
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Venture Capital
Venture Capital is a subset of private equity that targets early-stage businesses with great potential for growth. Although they carry more risk, these investments can also provide outstanding returns. VC companies offer not only funding but also mentoring, strategic direction, and networking opportunities to entrepreneurs. The National Venture Capital Association (NVCA) estimates that US venture capital investments in 2020 would be $156 billion, therefore highlighting the sector’s explosive growth.
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Growth Capital
Growth capital is also termed expansion capital and is aimed at established businesses wishing to extend operations, penetrate new markets, or fund a major acquisition without changing control. Unlike buyouts, growth capital investments do not call for a majority stake. They concentrate on driving the direction of expansion of the business. For instance, General Atlantic’s 2009 Alibaba investment helped the business grow its e-commerce platform, therefore contributing much to its global success.
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Mezzanine Financing
Mezzanine Financing is a mix of debt and equity and is often employed by businesses to support development initiatives. Its subordinate position in the capital structure results in more returns than those of conventional debt. Investors get equity stakes in the business, so it allows upside possibility if the business does well. An example is the mezzanine financing provided by Falcon Investment Advisors to support the expansion of HealthEdge, a healthcare IT company.
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Distressed Investments
Distressed investments involve acquiring companies or their debt securities, often at significant discounts, due to financial instability. Private equity organizations want to turn around these businesses with operational enhancements, refinancing, or restructuring. This approach calls for great knowledge in turn-around plans and crisis management. Apollo Global Management’s acquisition of the bankrupt chemical company LyondellBasell in 2010 is a notable example, resulting in substantial returns post-recovery.
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Real Estate Private Equity
Real estate private equity is the pooling of funds to invest in real estate assets—commercial buildings, residential developments, and debt related to real estate. Investors can benefit from property appreciation, rental income, and tax advantages. Blackstone, one of the largest real estate private equity firms, had an impressive $187 billion in real estate assets under management as of 2020, showcasing the sector’s lucrative potential.
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Fund of Funds
A fund of funds (FoF) invests in a diversified portfolio of other private equity fund structure instead of directly investing in companies. This method lowers risk by diversification and gives investors wide access to many PE techniques. The main benefit is the availability of top-notch funds that might not be reachable for regular investors. Although foF managers charge extra fees, the diversification advantages usually exceed these expenses.
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Secondary Investments
Secondary investments involve purchasing existing private equity fund stakes from other investors. This market lets investors have liquidity before the fund matures. Particularly when obtained at a discount, secondary investments might present satisfying returns. Reflecting its increasing relevance in the private equity setting, Greenhill estimates that the secondary market will see transaction volumes of around $85 billion in 2020.
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Private Investment in Public Equity (PIPE)
PIPE transactions involve private equity firms purchasing shares of publicly traded companies, often at a discount, to provide capital for growth or restructuring. These private equity strategies let public firms raise money rapidly without going through a full public offering. An example is the $1 billion PIPE investment by Silver Lake Partners in Airbnb during the COVID-19 pandemic, which helped stabilize the company amid travel industry disruptions.
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Infrastructure Investments
Investments in infrastructure focus on basic needs including utilities, transportation, and communication networks. Risk-averse investors find these investments are typically stable and provide long-term cash flows. Brookfield Asset Management, a prominent player in this space, had over $150 billion in infrastructure assets under management in 2020, highlighting the sector’s significance.
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Social Impact and ESG Investments
Environmental, social, and government (ESG) investments give social responsibility a priority alongside financial profits. These projects seek to have good effects on society like affordable housing, renewable energy, and sustainable development. The Global Impact Investing Network (GIIN) reported that the impact investment market size reached $715 billion in 2020, indicating increasing investor interest in this ethical investment approach.
Conclusion
From buyouts to social impact investments, the realm of private equity presents a variety of chances for investors. Every type of investment has different risks and benefits, hence it is important to match your investment plan to your risk tolerance, private equity strategies and financial objectives. Knowing the various kinds of private equity investments helps you to make wise selections that support the expansion and performance of your portfolio.
