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Money provided by investors to startup firms and small businesses with perceived
long-term growth potential. This is a very important source of funding for startups
that do not have access to capital markets. It typically entails high risk for the
investor, but it has the potential for above-average returns.
Private Placement
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Stock Exchange. This may result from a bad economy, prohibitive rates on
credit markets, high corporate indebtedness or mediocre operating
performance. In a typical private placement, the issuing firm reaches out to
investment bankers who in turn place, or distribute, the company's debt and
stock products to a small number of investors.
Private Equity
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Relationship
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Personnel Involvement
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Definitions
A private equity investment is made by investor/s as per goals, preferences
and investment strategies of the firm or individual investor. In general private
equity provides working capital to the target company to cultivate expansion,
invest in new-product development, or restructure of the company.
One of the most common investment strategies in private equity is called
venture capital investment or growth capital.
Myth Busting
Private equity investments is not new, in fact it has been in existence for
almost a century and was the domain of wealthy individuals and families.
Some of the most famous families like the Wallenbergs, Vanderbilts,
Whitneys, Rockefellers, and Warburgs could be termed as pioneer venture
capitalists. For example, Laurance S. Rockefeller helped finance the creation
of both Eastern Air Lines and Douglas Aircraft in 1938. Eric M. Warburg
founded E.M. Warburg & Co. in 1938, which was the forerunner to the current
entity of Warburg Pincus, one of the largest private equity funds with
investments in both leveraged buyouts and venture capital.
The Wallenberg family created Investor AB in 1916 in Sweden and acted like
venture capitalists for marquee Swedish companies such as ABB, Atlas
Copco, Ericsson, to name a few.
The confusion between the activities arises as the terms are often used
interchangeably even by those who are practitioners of this form of
investment.
Both VC and PE are in the business of buying cheap and selling dear.
However the approach to this challenge is what fundamentally differentiates
the two entities.
Private equity firms usually take interest in a pre-existing enterprise with
established products and having positive operating cash flows. The PE firms
try and restructure aspects of company which will optimize the companys
financial performance. If the work comes out in a proper fashion then Private
Equity has demonstrated its ability to save poorly-performing companies from
bankruptcy and turn them into viable enterprises.
The venture capital process is usually much messier. Often, you start with
nothing more than a brilliant idea and the people behind it and work on
realization of the next big idea.
To make things easier, we can say that a PE fund will polish a rough diamond,
whereas a VC firm would make investments in land parcels hoping or the next
diamond mine to be in one of its investments.
What They Do
Both PE firms and VCs invest in companies and make money by exiting
selling their investments.
Key Takeaway
To summarize the battle for Private Equity Vs. Venture Capital we may say
that if you are number driven person with a passion for making things better,
then Private Equity is the place to be. You would enjoy the high that big ticket
investments make.
However, if you wish to unearth the next big thing and believe that you have it
in you to find the next Google, Apple or WhatsApp or something which no one
thought would change the world, then Venture Capital would warm the cockles
of your heart.