Types of Private Equity

There are two major types of private equity:

• Venture Capital
• Buyouts

In US, "private equity" is generally used to refer the buyout and buy-in investment sector and "venture capital" refers to an initial early stage investment. In Europe, "venture capital" refers to investments at all stages. In modern days, across the globe, the term "private equity" has become common for all stages. 

Venture Capitalists specialize in providing finance to high risk operations. They look out for early stage companies, generally in the technology or life sciences businesses. The capital investment is provided in exchange to an equity stake in the business. This gives an opportunity to these small and growing companies to move on to the next stage of development avoiding to borrow from a bank or lender, which can lead to higher interest payments.

Types of Venture Capitalists:

Traditional wealthy families: Rich families in the US sometimes supply venture capital for many years.

Limited partnerships and closely-held corporations: There companies often raise capital from institutional investors, such as insurance companies or pension funds. 

Investment and commercial banks.

Wealthy individuals: A network of wealthy individuals is capable of tolerating high-risk investments and depend on each other for advice. 

Buyouts are generally appear more attractive for more capital. Buyouts concentrate on a later-stage financing in a company's growth life cycle. Revenues generated by the business can be used to pay down the debt, assuming these borrowings were used as a part of the acquisition process. 

Various stages of a typical buyout process:

1. Identify an ailing or undervalued company
2. Buy a controlling stake
3. Take the company private (if necessary)
4. Improve company's prospects

Generally, in a buyout, all or most of the management team is retained as the team knows the business well and is aware of the risks. The rewards in this are high.

Leveraged Buyouts (LBOs)

Buyouts can be financed by debt and by equity. Equity funding itself is enough for small venture capital investing, though large deals are generally financed by debt as well as equity. These deals are referred to as leveraged buyouts (LBOs).

The deals leverage is determined by ratio of debt to equity. the leverage is determined by the company's ability to service the debt with its on cash flows. The equity portion is provided by the private equity firm or investors, while the debt portion could be in form of bank loans or bond issue. 

How is Private Equity Different from a Loan?

Private Equity companies provide medium or long term financing to companies. It provides long term capital to support unlisted companies grow and succeed. Hence it fills the equity gap, i.e. the missing public capital as the companies have been supported by private capital.

How is Private Equity different from a loan?

Raising private equity capital is different from raising a loan from a bank or lender. Banks have a legal right to interest on a loan and repayment of capital, which can be secured against some assets. Hence, banks gets its returns for sure irrespective of the success or failure of the business.

Private equity is not secured against any assets,  but is an investment in exchange for a stake in the company. As shareholders, the private equity company's returns are dependent on the success and profitability of the business. It offers high risk and high returns as compared to the fixed returns earned by banks in a loan.