Tuesday, February 1, 2011

Types of Private Equity

In my previous article "Private Equity" we saw what Private Equity is and what its purpose is. There are many different types of Private Equity that are available. In this article, we shall take a detailed look at all of them one by one

Venture capital:

Venture Capital involves the financing of start-up companies. These companies generally don’t have the ability to source capital from traditional sources like banks or public markets as they are in the early stages of their life cycle and often generate negative cash-flows. So, rich individuals who can afford to take huge risks usually invest or rather fund such new business ventures.

Financial is provided during the following 3 stages:
1. Seed Stage – For research, assessment and development of an initial concept
2. Start-up Stage – To finance product development and initial marketing of the product
3. Expansion Stage – For the increase of production capacity, development of markets or products or enhancement of working capital.

Growth Capital:

It refers to equity investments, most often minority investments in relative mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a major acquisition with a change in control of business. Companies often seek growth capital to finance a transformational event in their life cycle. These companies are usually more mature than venture capital funded companies. They are able to generate revenue and operating profits, but don’t have sufficient funds for major expansions or acquisitions.

Leveraged Buyout:

The objective of a buyout is to purchase a significant portion or obtain majority control of a company. Buyouts attract a bigger portion of private equity capital, both in number and size of deals, then venture capital transactions. Buyouts lend to concentrate on the later stage financing in a company’s lifecycle, thereby taking on more established and mature companies that have a steady, stable and predictable cash flows from the business. Cash flows generated by these companies can be used to pay down the debt, assuming borrowings were used as part of the acquisition process. Larger deals are usually financed by debt as well as equity. These deals are called Leveraged Buyouts or LBOs.

Distressed Debt:

These debt funds seek to acquire controlling stakes in companies that are in financial difficulties or even insolvent through the purchase of debt. They convert this debt into equity through the reorganization of the company.


Infrastructure is broadly defined as the permanent assets a society requires to facilitate the orderly operation of its economy. It is the backbone of the economy and is considered an absolute precondition to sustainable economic and industrial development. Due to the large size, cost and often monopoly characteristics of these asses, infrastructure has historically been financed, built owned and operated by the government. Infrastructure assets include:

1. Transport: Toll roads, airport, railways etc
2. Energy: Gas and Electricity transmission, power generation and distribution
3. Water: Irrigation, portable water, waste treatment
4. Communications: Broadcast/Mobile towers, satellites, transmission networks
5. Social: Educational facilities, healthcare facilities, correctional facilities


It is a hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies. Mezzanine financing is advantageous because it is treated like equity on a company’s balance sheet and may make it easier to obtain standard bank financing.

Secondary Funds:

The secondary market for private equity is a market for the buying and selling of capital commitments to private equity funds by limited partners, i.e., secondary funds purchase existing limited partnership interests from investors in private equity funds after those funds have been partially/fully invested in underlying portfolio companies.


  1. Hi anand,

    Thanks for Explaining about Private Equity and its different types. can you please post new article with Examples on each scenario of private Equity. how it leverages the companys and i want to know about Fund Of Funds and Direct Investments.

  2. @ Vimal
    Thank you. I will keep that on the queue and write about it.

    A Fund of Funds is similar to a mutual fund but with a slight different. you may know that mutual funds buy shares, a fund of fund buys other mutual funds. So, the NAV of the fund of funds MF will move according to the NAV movement of all the mutual funds that it has bought.


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