5 Major Types of Private Equity Funds

Chris Gilbert
4 min readApr 20, 2021


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

An LBO is the acquisition of another company where the acquisition cost is met by borrowed money — bonds or loans. Here the private equity firms make large acquisitions without a huge capital commitment, say 90 percent debt and 10 percent equity.

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

Venture capital funds are another type of investment wherein the funds are invested for start-ups and early-stage companies where there are high growth prospects. VC funds do not involve a high stake, but take only a minority stake and leave the control to the company management itself. Though it seems to be a riskier strategy, as they have less capital investment they may escape from huge loss and if they win, will get a good portion of the profit.

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

It is another type of fund, where the fund gets invested in mature businesses looking forward to scaling operations and enter new markets. It can be considered as a ‘later’ stage VC funds. It forms a bridge between venture capital and private equity. These funds are appropriate for companies that have proven business models.

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 financing enables companies to raise funds for specific projects. This finance yield generous returns as compared to corporate debt and lower risk than equity. It pays somewhere between 12% and 20% per year. These loans are generally used for the expansion of established companies.

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

In distressed PE, the firms in troubled companies. Distressed PE funds specialize in investing in companies that possess serious financial difficulty. The funds buy shares that are of less cost, restructure the company, and return to financial health yielding a profit. Likewise, there are hedge funds blurring the lines between private equity and hedge 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.