Private equity investments are an important source of capital for new and emerging firms, distressed firms, and both private and public firms in need of capital. One reason is that private investment avoids the cost associated with pursuing a public stock offering; another is that private equity securities are not regulated as stringently as are public securities.

In addition, private equity investors, such as professional venture and buyout firms, institutional investors and high net worth individuals, can provide capital in situations where traditional lenders lack the necessary expertise. In these cases, private equity investors can be a valuable resource to these private companies, whether the companies are seeking to develop an initial business idea, expand a business or reconfigure it to become more profitable. The universe of private equity investments comprises a number of distinct strategies, spanning a company’s entire life-cycle.

Investing in an underdeveloped or developing product or company Venture capital is financing provided by professionals who invest alongside the management of emerging, rapidly growing companies that have the potential to develop into significant economic contributors. Venture capital is an important source of equity for start-up companies, often providing the “seed capital” needed for research and development. Venture capital also assists start-up companies as they begin operations and actively market their products and services. At later stages of a company’s life-cycle, venture capital can help to finance the expansion of operations, develop new products and access new markets, as well as provide replacement capital when needed. Venture partnerships typically experience a performance cycle that yields negative or flat returns in the early years, modest returns in the middle years, and, in the case of profitable ventures, significant returns in later years. 

Acquiring a complete or controlling position of another company

A buyout fund, sometimes known as a leveraged buyout or “LBO,” seeks the takeover, controlling interest, or complete ownership of a company. A buyout fund employs leveraged capital – a mixture of debt typically secured by the assets of the business, and equity provided either by the fund’s capital or newly raised funds.

Buyout funds may take an active or passive role in managing the acquired company.

The return from a buyout fund is usually determined by the amount of leverage used, the success of the buyout group in enhancing the business, and market valuation once the company has a liquidity event.

In a management buyout, the current or new management of a company will partner with a private equity investor to perform a buyout of an existing company. In a management buy-in, a new management team takes over management of an existing company.

Other strategies include recapitalising privately held firms, buying and expanding publicly traded companies, and buying businesses to divest non-core divisions.

Financing the expansion of an existing company

Mezzanine capital is a late-stage investment typically employed just prior to an initial public offering (IPO). Investors entering a private equity fund at this stage typically take on less risk than at earlier stages due to anticipated capital appreciation or liquidity events resulting from the upcoming IPO.

Mezzanine financing is a hybrid of lending and equity investing, and broadly refers to unsecured, high-yield, subordinated debt or preferred stock. With higher repayment priority than equity, it can facilitate payment of new management ahead of existing management in the event of bankruptcy, and is often used in acquisitions and buyouts.

Mezzanine financing may take the form of a seller note, where the seller lends a portion of cash proceeds to the company.

Acquiring distressed or equity-linked debt

"Special situations" broadly cover distressed debt, equity-linked debt, project finance and other one-time opportunities stemming from changing industry trends or government regulation, that are expected to cause an increase in value in a company.