Private Equity refers to the equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity.
Types of Private Equity
1) Leveraged Buyout – LBO is an acquisition of a business using mostly debt and a small amount of equity. A company will secure the loan by using the collateral from the company they are looking to purchase. They use this loan to buyout all the outstanding shares of the company. In LBOs interest is paid like in conventional loans. The acquired company will have to make enough money to cover the risks associated with the loan. That’s why LBOs are considered more risky.
2) Venture Capital – Funding for start-up companies considered to have strong growth prospects. Most venture capital is obtained from one or more VC firms, generally in an exchange for an equity stake and majority of the control. Funding is often provided in staged providing sufficient cash to reach the next milestone. VC firms may also provide management assistance and other services.
3) Growth Capital – It’s a type of PE investment in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a significant acquisition without a change of control of the business.
4) Distressed and Special situations – These are investments in equity or debt securities of financially stressed companies. They can either be:
a. ‘Distressed to Control’ or ‘Loan to Own’ strategies
b. Special situations or turnaround strategies.
5) Mezzanine Capital – It is a preferred equity instrument that represents a claim on the company’s assets which is senior only to that of the common shares. It is used in Leveraged Buyouts in conjunction with other securities to fund the purchase price of the company being acquired. It is often a more expensive financing source than secured debt.
By:
Vivek Kumar (pgp01050.iimrohtak@iiml.ac.in)
Prince Kumar (pgp01030.iimrohtak@iiml.ac.in)
