Venture Capital and Private Equity

Venture capital and private equity are sub-sequential terms that often become confused in definition. Private equity is the term concept for equity investments not open for public trade. Essentially, private equities invest for partial ownership in privately owned companies or private securities of public companies with intention of significantly increasing profit. Majority of the money used to buy existing companies is borrowed or raised by investors. Once private equities purchase the company, they place the debt within the balance sheet of the company as a way of improving overall profit. This means they eliminate job positions and other resources of the company in order to decrease spending money. They then sell the company for a profit after the company has been financially improved.

Private equity fund are divided into four predominant categories: captive funds, semi captive funds, independent funds, and public sector funds.

  • Captive funds are provided to businesses by one shareholder such as a insurance company, financial institution, or investment bank.
  • Semi-captive funds are provided by one major shareholder of the business, but a small portion also comes from several other shareholders.
  • Independant funds are provided by third party companies. This is the most conventional method of private equity funds because no one shareholder is at major risk of losing a large investment.
  • Public sector funds are provided solely by the state or federal government.

Venture capital is similar but far different then the business strategy of private equity. Venture capital companies use private equity funds in order to invest in starting businesses that possess great potential for growth and popularity among the public. Basically, they help bring starting businesses up the ladder of success and receive partial ownership of the company in exchange. Years after investment, venture capital companies typically take the business public or consolidate it with another company. Afterwards, they leave the business by selling their partial ownership for a profit.

Generally, capital venture companies only risk investment on new business that show high amounts of return during a definite period of time, such as three years. They also target businesses that have distinctive services or products and selling strategies that give an advantage over rival competition. Many of the venture capital companies only invest in businesses with a minimum of $2 million; however, in smaller areas, regional companies typically start investment at $50,000.

Find out more strategic financial investment topics from David Hand Crescent Point Singapore or stay up to date with Crescent Point Private Equity news, the leading emerging markets investment management and financial advisory firm primarily targeting in the Asia-Pacific and Middle East regions.

Watch the Betsy Flanagan of Startup Studio interviews venture capitalist David Hornik of August Capital and the creator of VentureBlog on how to become a Venture Capitalist!