What is Private Equity?
Private equity is an alternative form of investing which consists of companies raising capital who are not listed on a public exchange (stock market). Private equity can be in the form of a fund or direct investment into the company by institutional or retail investors in exchange for an equity stake in the company.
The funds are used by the private company to fund new technology, make acquisitions, expand working capital and or strengthen the balance sheet.
Advantage of private equity for companies:
- Private equity offers companies and startups access to liquidity as an alternative to conventional financial mechanisms, such as high interest bank loans or listing on public markets.
Advantage to investors:
- High Returns: Investors can generate very high returns (up to 10X) in unlisted privately owned companies with great growth potential.
- Reduced Risk: Private equity investments are most commonly an investment into a mature/revenue generating company which is using funds to scale up the business to the next level. This investment is generally lower risk as the company has proof of concept and is already generating revenue.
What is Venture Capital?
Venture capital is a form of private equity where investors provide capital to startup companies or entrepreneurs. This is very early stage investment with the highest possible return and risk, the holding period for this type of investment can be as much as 10 years however the return potential is limitless.
Venture capital can take several forms such as:
- Seed financing: refers to capital provided by an investor commonly known as angel investors this capital is generally used to scale an idea from prototype to a product or service.
- Series A funding: this funding is needed after the seed round and is generally needed once the proof of concept has been completed, this financing enables the company to expand production or services to actively compete in their market.