Private Equity and Venture Capital Firms: Some Key Differences

People often think of private equity and venture capital as the same thing, perhaps in part because venture capital is one form of private equity. Both firms invest in companies, recruiting members of the financial industry to work with them. And both make money from their investments rather than collecting fees for advising clients.

There are some basic differences in how the two function, however.

Private Equity Firms

If you’re the typical investor, the world of private equity investing may be unfamiliar to you. Your portfolio is comprised of publicly traded stocks, whether you hold these directly, as part of a mutual fund, or through your company’s pension plan. As a stock investor, you hold a very small stake in the business.

Private equity firms, on the other hand, gather funds from wealthy individuals and use them to purchases entire companies at an auction. The company becomes private as the result of the sale; that is, it is no longer traded on the stock market.

The private equity firm sinks capital into the company, making improvements to boost revenues and increase its overall profitability. Typically, private equity firms use a leveraged buyout, or a takeover funded primarily through debt, to finance the deal. The company’s assets may become collateral in the loan.

The company subject to the buyout will either start to turn a profit, at which point the firm either sells it to a larger corporation or begins trading it on the stock market. When the buyout is unsuccessful, the company is typically forced into bankruptcy.

The chief characteristics of private equity are

· The private equity firm purchases 100 percent of a mature, public company.

· It invests large sums of money — up to billions of dollars, depending on the size of the company.

· It structures the deal through a combination of equity and debt.

· Because they invest in proven companies, private equity firms operate with a known amount of risk.

Venture Capital Firms

Unlike private equity firms, venture capitalists look for promising companies in which to invest startup funds. Joint venture firms provide capital to a company that has typically not yet gone public in the hope that the company they invest in will become the next Microsoft. They opt for a smaller stake in the company, knowing that if the company succeeds, they will get a large return on their investment.

Venture capitalists invest in companies that are poised for growth, or have already demonstrated growth, typically in the technology sector.

With venture capitalism, the risks are much greater — it is more difficult to predict the future success of an emerging company than it is to turn over a proven one — but these risks are not evenly spread across the playing field. The bigger, more successful venture capital firms are typically able to attract the best start ups; thus, the more influential the firm, the better its track record for investments will be.

Venture capitalism has the following general characteristics:

· Venture capital firms do not assume a controlling interest (more than 50 percent) in the company in which they invest; the stake is typically smaller.

· They use equity alone to structure the investment.

· They spread small capital investments over a variety of companies, expecting many of them to fail.

The chance of a VC investment paying off is about one in three, notes Fred Wilson, a venture capitalist blogger. On the whole, these investments are more volatile and require intimate industry knowledge, as well as a great deal of market savvy.

For that reason, you’ll see a bigger mix of people working at a venture capital firm — including business development specialists, consultants, and former entrepreneurs — than you will at a private equity firm, where the average partner is a former investment banker with the skills needed to build a leveraged buyout model.

<Peak Finance Company, Commercial

Peak Financial Company, Commercial provides access to conventional debt financing, joint venture equity, mezzanine and bridge financing, and structured debt. They are consistently able to secure the best terms available, whether through Wall Street investment banks, pension and opportunity funds, commercial banks, insurance companies, or private equity investors.