What exactly is Private Equity?
VC is one of the types of private equity - as opposed to public equity- where an individual or a group of individual funds your business to reap a much better return later through sale or IPO. To understand VC , it is important to understand the larger PE picture.
An excellent note detailing careers in Private Equity is found here :
http://mba.tuck.dartmouth.edu/pages/clubs/peclub/pdfs/Private_Equity_Careers.pdf
In typical PE language , General Partners are the folks who raise a fund and Limited Partners are folks who invest their money in the fund. The PE firm charges fees for fund management during the lifetime of a fund, the fees being typically 1-3% , and when an investment is sold or publicly listed , LP's share is returned at hurdle rate : 8-10% . Profits above the hurdle rate are split between GP's and LP's according to a prior formula. The GP's share is called Carried Interest or just Carry. Usually , non-partners in a PE firm receive a salary but minimum to no carry.
A quick summary would describe different PE investment types as :
VC - Early stage companies , typically these companies would have already raised seed funding through a wealthy individual , also known as an angel investor. Few VC's invest directly at the seed stage.
LBO/Leveraged Buy Out - Mature companies with a recent history of underperformance or business groups which are not directly relevant to a company's goals anymore. PE folks expect to add value and then sell it to another company or to the public via the stock market.
Mezzanine - These funds usually invest in companies with strong growth potential. Its basically a kind of compound interest loan where the investee does not have to pay full interest until maturity - say 5 years. On maturity , the interest repayment rate would be higher than a straight debt instrument , so typically Mezzanine funds invest in companies which will have excellent cash flow in near to mid term future.
Secondaries/Funds of Funds - These are firms/organizations which invest in other funds - including both VC and LBO - by buying a stake from Limited partners before the fund matures.
This generates some short term cash flow for LP's since lifetime of a fund can be upto 10 years.
1 comment:
In September I would have speculated that MS would not be treating a first-tier Orange Country business investment like Blackstone this way. But as the Fall has progressed and the potential liability increased it is clear that banks are willing to risk even their largest clients to wriggle away from some of these deals.
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