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What are the different types of private equity funds out there?
• Leveraged Buyout Funds (LBO)
Typically acquire controlling stakes, either alone or in partnership with other PE firms, of mature, cash-flow-stable companies. To finance these transactions, they will use a combination: debt in the form of bank and term loans and equity capital (from the GP and LPs).
That means PE firms buy companies using a little bit of their own money, and a lot of borrowed money. The debt portion of a transaction would account for as much as 85% and would sometimes even exceed 90%.
In order to create value, PE firms typically depend on a combination of techniques, including cutting costs and CapEx to expand profitability, streamlining working capital, striking new partnerships to open new revenue sources and buying related companies and combining them together.
• Venture Capital Funds (VC)
Usually invest in minority stakes in startup companies, often in high-growth sectors like internet and consumer technology, bio-tech and healthcare technology, and energy. These days, VC firms basically come in two flavours—very early stage vs. later stage funds. They typically do not invest based on cash flow modelling.
"Early” stage funds typically invest in companies that have raw technical talent to invent and commercialise new technologies; they help fund them to show proof of concept, feasibility, and consumer desirability.
“Later” stage funds invest in companies that are looking to scale operations to true viability. Their strategies generally involve helping portfolio companies maximise their growth potential by introducing them to new customers and partners, helping them recruit world-class engineering, technical, and managerial talent, and coaching them on how to expand and professionalize various corporate functions (e.g., finance, marketing, sales, HR, legal).
• Growth Equity Funds
Invest in more mature businesses that are looking to scale operations and enter new markets. They invest more broadly than VC funds in terms of industries. Sometimes, VC or PE funds will have growth equity divisions, which also blurs the line even further. You can think of growth equity funds as “bridge” funds between VC and PE.
“Private equity” is just a generic term used to identify a family of alternative investing methods; leveraged buyout funds, growth equity funds, venture capital funds, certain real estate investment funds, special debt funds (mezz, distressed, etc), and other types of special situations funds.
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