Definition of Private Equity

Private equity is a term that is used when talking about finding funding for a business or startup. Private Equity encompasses venture capital funds, leveraged buy-out funds and mezzanine funds. Venture capital funds focus on small companies that are in the early stages of development. Although the risk is high for venture capital funds, the potential for a high payout from these companies is huge. This is because if an investor is getting in on the ground floor, there is the potential for a large return, as small companies that are successful will typically grow fast. However, this high return is typically needed, since most of these companies do not survive. For this reason, a venture capitalist may need at least one of his investments to succeed to fund the ones that fail. In order to ensure a solid return, some venture capital funds are known for taking control of the companies, as a way to ensure the company is headed in a profitable direction.

Mezzanine funds focus on subordinated debt financing and look for a relatively small amount of debt. Also known as private equity, mezzanine funds typically have a mixture of debt and equity. This gives an investor a mix of collateral by investing in a single fund.

Leverage buy out (or LBO) funds seek to acquire mature companies for medium term results. In recent years, LBO funds have enjoyed a relatively high return, with the ability to borrow funds at a low rate. In addition, LBO funds typically have limited risk, when compared to venture capital funds, as they are entitled to a portion of the company’s assets if a restructuring effort were to fail. This is because the owners of a distressed company’s debt have entitlement to their assets, if liquidation of the company assets were to take place. In other words, even if the company does not turn around and become profitable, there is still the likelihood of getting some form of return. In some cases, investors can find investment opportunities in mezzanine funds with companies that have a high amount of assets. In these cases, investing in such a company is a win-win opportunity.

Mutual funds have a variety of investment options available, including taking part in private equity opportunities. When picking a mutual fund, it may make financial sense to investigate their track record to see if they have been a part of private equity opportunities in the past. Although risky, the potential for a high return exists.

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