A Guide to Private Equity Fund Structure and Investment Strategies
Private equity (PE) funds are structured to pool investments from Limited Partners (LPs) and managed by General Partners (GPs), which are the backbone of various types of PE investments. These funds deploy capital in diverse ways depending on the strategy and goals of the PE firm. These funds are typically structured as limited partnerships, enabling general partners to apply diverse private equity strategies.
For startup entrepreneurs, the search for private equity investment can feel overwhelming. With numerous types of PE firms to consider, knowing where to begin is challenging. Below we have discussed the primary types of PE investments to give you a solid understanding and to identify the right partners who align with their business goals and growth stage, ultimately improving their chances of securing the right investment. Before we proceed, let’s first brush up on the structure of private equity funds.
Understanding Private Equity Fund Structure
Private equity (PE) funds are typically structured as limited partnerships, where general partners (GPs) manage the fund and make investment decisions. These funds can engage in a range of investment strategies, including leveraged buyouts (LBOs), mezzanine financing, private placements, distressed debt, or as part of a fund-of-funds portfolio.
GPs are responsible not only for selecting investments but also for securing capital commitments from limited partners (LPs). LPs are often institutional investors — such as pension funds, university endowments, and insurance companies — as well as high-net-worth individuals. This structure enables GPs to pursue a diversified portfolio on behalf of their investors.
Types of Private Equity Investments
Private equity (PE) investments vary widely based on the stage and characteristics of the target company, the investment strategy, and the goals of the PE firm. Here are the primary types of private equity investments:
- Buyouts
- Venture Capital (VC)
- Growth Capital
👉Buyouts
A buyout refers to the purchase of a controlling stake in a company, often leading to a shift in ownership and management control. This term is commonly used interchangeably with “acquisition.” When the company’s management team itself purchases the controlling interest, it’s known as a management buyout (MBO). If the buyout is primarily financed through debt, it’s called a leveraged buyout (LBO). Buyouts frequently occur when a company decides to go private, requiring the buyer to acquire more than 50% of the company’s shares to secure control.
Specialized firms handle the funding and coordination of buyouts, sometimes working independently or partnering with other firms. They often rely on financial backing from institutional investors, high-net-worth individuals, or loans. In LBOs, large amounts of borrowed capital are used, with the acquired company’s assets frequently pledged as collateral to secure the financing.
Types of Buyouts
- Management Buyouts (MBOs): An MBO offers an exit path for large corporations that wish to sell off non-core divisions or for private business owners looking to retire. Here, the company’s own management takes control, ensuring continuity while aligning closely with strategic goals.
- Leveraged Buyouts (LBOs): An LBO involves financing the acquisition with substantial debt, with the target company’s assets often used as collateral. This approach allows the buyer to maximize returns with minimal upfront investment, though it also introduces higher financial risk due to the debt load.
👉Venture Capital (VC)
Venture capital (VC) is a type of private equity focused on funding startups and early-stage companies with high growth potential. Venture capital firms raise capital from limited partners (LPs) and invest in these promising businesses, often offering not only financial support but also technical guidance and managerial expertise.
In exchange for their investment, VC firms acquire ownership stakes in the companies they fund. Venture capital can be introduced at different stages of a company’s growth — such as seed funding and early rounds — and plays a crucial role in fostering innovation and expansion across industries.
👉Growth Capital
Growth capital, also known as growth equity or expansion capital, refers to investments in mature companies aimed at fueling further growth, contrasting with venture capital, which typically targets pre-profit businesses. Growth capital is used to accelerate an established expansion plan, allowing companies to enter new markets or fund product development.
In growth capital investments, investors usually acquire a minority stake rather than full ownership, as in buyouts. However, they still expect to influence how the funds are utilized and have input on company operations. Growth equity investors typically plan to exit once the business reaches predetermined growth milestones, often through an initial public offering (IPO), a share buyback, or a sale to another private equity firm or trade buyer. Growth capital is commonly supplied by venture capital or private equity firms.
Conclusion
Understanding private equity fund structure and strategies is essential for investors navigating the complexities of the PE market. By aligning various private equity strategies with a clear fund structure, firms provide targeted investment opportunities that cater to different risk and return profiles. As private equity continues to shape the financial landscape, these funds offer invaluable pathways for business innovation and growth.
