What the difference between......

[Mto1Shot]

Hi all,

Please can someone tell me what is a private equity company and how it differs from a venture capital campany? What they and how they actually make money, etc.

Your help would be really appreciated. I'm from a non-finance background and looking on the internet has just confused me.

Thanks

 

[JoeyDVivre]

Lot of overlap but different -

First - Equity is just an ownership interest in a company. The usual way that people think of an equity interest in a company is through publicly traded stock.

Private Equity is investing in a company by taking an ownership interest in a company by investing in stock that is either of a different class than is publicly available or in a company that is not traded publicly. Most private equity investments are passive investments (I'm going to get killed for that). Sometimes private equity is associated with more esoteric finance games like buyouts, PIPEs, etc..

Venture Capital is investing in companies that are "developing" and usually involves a more active role in the company than private equity. A venture capitalist may take just an equity stake but often the security is something more like convertible debt or convertible preferred stock so that the venture capitalist has claims on early cash flows. A venture capitalist usually looks for companies that require things like management expertise and financing plans and plans to make his return by adding value by investing these to the company.

 

[darkstar]

JDV's explanation is pretty good.

At the most basic level, VC/PE companies make their money by buying the equity of a company for a smaller amount of money, and then selling the company at a (hopefully) much higher price several years down the road. PE/VC funds tend to have a finite life, meaning that they are looking for some sort of exit opportunity (IPO, etc) in 5-7 years from making the investment.

As JDV said, a PE investment is more passive than a VC investment. VC funds tend to focus on one specific area (biotech, internet, etc...) where they have a lot of industry experience and expertise and can act as an advisor to the company.

Check out some PE/VC websites, it might help to clear things up. Search for these on Google.
VC - Sequoia Capital, Kleiner Perkins
PE - Bain Capital, Blackstone, Carlyle, KKR