Private equity

Private equity firms are private investors that invest in target businesses that have high growth potential. They then work with those businesses and their management teams over a period that typically lasts 3-7 years, before “exiting” (i.e. selling) those businesses, hopefully for a profit. 

These acquisitions are typically financed using a mix of equity and debt. Strategies typically employed to increase the value of businesses acquired include: improving operational efficiencies, cutting costs, improving synergies and economies of scale, driving greater sales, pursuing “buy and build” strategies (i.e. investing in “bolt-on” acquisitions whereby complementary businesses and/or competitors are purchased and integrated into a single corporate group), divesting (i.e. selling or shutting down) non-core or less profitable elements of the businesses, and improving discipline around capital and cash flow. 

During the investment process, private equity firms may initially look at 100 businesses, consider 10 of these in more detail (which may involve carrying out due diligence and commencing early negotiations of terms) and end up purchasing only four.

Venture capital

Like private equity firms, venture capital firms aggregate funds from institutional investors and private individuals, then aim to buy or invest in businesses and subsequently sell at a profit. However, venture capital firms tend to focus on early stage investee businesses (e.g. start-ups and scale-ups) and invest in small equity stakes, whereas private equity firms typically invest in more mature businesses and often invest in much larger stakes, using a combination of cash and debt.