5 Major Types of Private Equity Funds

Private equity firms are nothing but investment fund companies investing in the capital of an enterprise. They pool capital from institutional funds and accredited investors and invest them in companies where they find an opportunity for a high return. They plan a fixed investment for four to seven years, during which they improve the operations and later on profitably exit the investment. Exit strategies may include selling the business to another PE firm, strategic buyer, or IPOs.

A team of private equity investment professionals raise funds, manages funds, and enable profitable exit. The private equity funds generally fall into either one of these categories. Take a look at these most common private equity funds here.

Leveraged buyouts

LBOs are conducted to spin-off a part of the existing business by selling’ to transfer private equity or to take a public company private. The acquired private equity firms can realize high gains because the LBO candidates possess strong operating cash flows, product lines, management teams, and viable exit strategies.

The main benefit here is that the PE firms which acquire the companies put up a small amount, but rise capital by leveraging it with debt. The private equity fund holds a majority stake in the company and thus controls the firm’s strategy and movement while gaining high returns.

Some of the strategies they apply to create value includes-

  • Reducing costs
  • CapEx to expand profitability
  • Open new customer channels
  • Combine related companies [tuck-in acquisitions]
  • Engineering finance and multiple arbitrages

Some of the well-known LBO firms include Blackstone, KKR, and Carlyle.

Venture capital

So, thorough research is essential before investing. If the company is innovative enough, the expansion purpose will become a fruitful investment. The funds include seed capital, startup funding, interim funding, or expansion funding. Venture capital funding is more popular and operative in the new companies that have two years of history with full growth and poised to expand.

Some of the strategies they apply to create value includes-

  • Introduce the company to new partners and customers
  • Help them in recruiting high talent from across the world
  • Coaching them to expand corporate functions

Some of the well-known firms include Sequoia, August Capital, Andreessen, etc.

Growth equity funds

The source of returns depends on how the company scales its operations. Depending on the scalability, revenue, and profitability growth, the returns are high. It accelerates growth, offers liquidity to current shareholders, and funds acquisitions.

Growth equity investors typically employ team development tools to support portfolio companies. The investments align with investor and founder incentives.

Some of the well-known firms include TA Associates, Summit Partners.

Mezzanine capital

Mezzanine loans are unsecured debts with no amortization of principal. It could be structured in a way that is partly fixed and variable.

The main advantage of mezzanine debt is that the interest is tax-deductible. Moreover, the mezzanine financing is manageable than other debt structures. In case, the borrower is not able to make the scheduled interest payment, the interest gets deferred which is not possible in other debt types.

Some of the Mezzanine financing companies include Avana capital, NewSpring Foundation, Global Capital Partners fund, and Finance Boston.

Distressed PE funds

Some of the well-known distressed PE fund companies include Oaktree, Bain Capital, and Blackstone.

To conclude, these are major types of PE funds. All in all, private equity jobs are interesting. Thorough knowledge of different types of PE funds and their principles would help the professional to ace the career.

Sr. Financial Advisor at PageGroup, New York.