![]() Buyouts are generally perceived as strategies with more downside protection, as their investment targets are usually mature companies with stable cash flows and a strong tangible asset base. We see that tendency in the data, with capital loss ratio of nearly 33% for US Venture Capital. In Venture Capital, a rule of thumb is that for every 10 investments made, 5-7 companies return less than liquidation value, 2-3 generate modest returns and 1-2 are home-run investments. When we look at the capital loss ratio (defined as the percentage of fund capital in loss-generating deals over total invested capital of the fund) we see that Growth Equity is much closer to Buyouts than Venture Capital in that regard. Purchase of equity from existing shareholders (replacement capital) Table 1 Comparison of different Private Equity strategiesĬustomer acquisition, product enhancement, operational scalability Historically, Growth Equity investments have been characterised as minority investments in targets with limited free cash flow without using much leverage to fund the investment (PE Hub, 2012). The most widely used definition of Growth Equity describes it as the capital designed to facilitate the target company’s accelerated growth by expanding operations, entering new markets or consummating strategic acquisitions. By virtue of being at the intersection of two larger strategies, there has been a lot of confusion surrounding a potential all-encompassing definition of this particular strategy.įigure 1 Company life cycle graph Source: Gatti S., Investment Banking, Teaching Materials a.y. While Venture Capital focuses on businesses in Early and Seed Stage and LBO investors usually target mature companies, Growth Equity works with companies in the expansion stage (Cambridge Associates, 2013). The bankruptcy of Drexel Burnham Lambert, the Los Angeles-based investment bank that pioneered the Junk Bond market (the leading source of financing for Leveraged Buyouts) has also sent ripples throughout the Private Equity industry and caused this particular source of capital to temporarily dry up.Īt the same time, some investors have specialised in a strategy that sits in the middle of the Private Equity spectrum with VC on one end and PE investments on the other, generating handsome returns for their LPs and staying mostly under the radar until very recently. In the 1980s the attitude has changed due to several notorious corporate raiders – investors that used the LBO model to take over companies, often downsizing the operations of a firm through drastic cost cutting measures, liquidation of assets and elimination of jobs. The Leveraged Buyouts firms have historically generated very attractive returns through a combination of financial engineering and operational improvement of their portfolio companies (PortCos). ![]() However, the Venture Capital industry wasn’t free from controversies – especially after the dotcom bubble, which has caused investors and regulators to question (1) the valuations of VC-backed companies and (2) the supposedly “value-add” ancillary services these funds were providing to their portfolio companies (Hellman & Puri, 2002). Some of the largest companies in the world, such as Facebook, Google and Amazon, have used venture financing to grow and scale their business. Over time, both of these strategies have gained public attention with stories of spectacular successes and failures, leading to the enormous inflows of capital from institutional investors. Historically, the Private Equity industry was divided into two general silos – Venture Capital and Leveraged Buyouts.
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