You’ve probably heard the term “private equity” before. Indeed, Mack Capital is a private equity firm. What you may not know, however, is that there are nine variations of private equity strategies, each with advantages and disadvantages for investors.
When looking for an investment firm, you’ll want to pick one that offers the type of private equity that best suits your objectives and goals.
The Most Well-Known Type of Private Equity: Venture Capital
No matter if you’re in the startup scene or you watch the series Silicon Valley at home, you’ve probably heard of venture capital firms (VC, for short). These private equity firms invest in startups and early-stage companies with significant growth potential. Venture Capital is risky, but there can be a substantial payoff with the right company. Arguably the best example of how a startup investment is Peter Thiel’s $500,000 investment in Facebook. That investment happened in August 2004. By 2012, when Facebook IPOed, Thiel sold his share for $1 billion.
Growth Capital
Growth capital is the safer version of venture capital. In essence, growth capital investments target companies with a long history that need funds to grow their operations. The firm takes a minority stake in the company and eventually looks to sell that stake when the growth happens. An example of a growth investment might be a company that sells computers and needs money to build more factories to satisfy a more significant number of orders. There’s already a very well-established demand, so the investment is not as risky as venture capital.
Real Estate
Another type of private equity is real estate. Many people erroneously believe that real estate is safer, but these investments’ riskiness varies from fund to fund. Some funds look to invest in speculative developments that may or may not pan out. Others look to buy well-established buildings with long rent histories that provide stable incomes. Private equity firms, of course, can offer funds that invest in all types of real estate.
Investing in Other Funds
Some funds solely consist of investments in other funds. Private equity company A might offer a fund that invests in funds in other private equity companies. These types of funds are an excellent way to diversify your private equity investments.
Mezzanine Capital
This type of private equity is so named because it tries to balance risk and reward. The idea of mezzanine capital funds is to achieve a lower risk than equity but a higher return than pure debt financing. Investing in preferred stock is one example of mezzanine capital – it’s less risky than equity because it has a higher claim on company assets. Still, it can have a better reward than buying bonds and other debt.
Distressed Funds
This somewhat unique private equity fund type looks for distressed companies and injects them with capital, often with generous terms for the private equity company. The shares of distressed companies come very cheaply, of course. Once infused with money, the hope is that the company will turn itself around, and the fund can offload those shares for a substantial profit.
Secondaries
This type of private equity is also a little less ordinary. You can sell your investment commitment in a fund. This type of private equity looks to buy those commitments at a discount and profit from them. These funds can also sometimes take over assets from the portfolio of another PE firm.
Infrastructure Funds
Private equity funds sometimes invest in core infrastructure components, like utilities, wind, airports, and roads. Funds that are investing in renewable energy are some of the most popular infrastructure-oriented ones now.
Leveraged Buyout
Last but not least are the leveraged buyout private equity funds. These funds look for companies to purchase using both investor funds and borrowed money. Think of it a little like a mortgage. The fund might have 50% of the company purchase price and have the option to borrow the other 50% from the bank. With leveraged buyouts, the private equity fund typically takes the majority stake in a company, enabling it to control the company outright.
Consider Which of These Nine Private Equity Types Best Suits Your Financial Objectives
Each one of these types of private equity has pros and cons. A conservative real estate fund, for example, might earn consistent dividends and preserve capital, but it may not have the same potential return as venture capital does.
If you’re interested in investing in private equity and would like more information on each of these types (including what we offer at Mack Capital), please contact us to schedule a consultation. We’d love to hear more about what you’re looking for in a PE firm to see if our signature Mack Fund offerings would be a good fit for your financial objectives!