Saturday, 2 October 2021

Types of private equity funds

 Private equity firms can be defined as the pools of the funds or the capitals to get invested in those startups or companies that offer the opportunity for higher profit returns. The private equity firms comes with fixes investment horizon that generally ranges from four to seven years or at the point where the private equity firms is expected to beneficially exit all the investment.

The exit strategies for the private equity firms includes the sale of the company to any other private equity firm, or the IPOs or other strategic buyers. The accredited investors and the institutional funds are generally the major primary source for the private equity capital in order for the extended time period. The funds or the capital in a particular Private equity firms are managed by the professional teams of the investors.


The equity is further classified in four categories and these are:

  1. Shareholder loans
  2. CCPPO shares
  3. Preferred shares
  4. Ordinary shares

Generally, the proportions of equity accounts for 30 to 40 percent of funding in the buyout type. The private equity firms typically invest in those equity stakes that are having their exit plan of 4 to 7 years. The most common type of sources of capitals for equity funding includes private equity funds, management, investment banks, and subordinated debt holders. Generally, the combination of all the above mentioned sources combined comprises the fraction of equity.

Types of Private equity funds

There are two categories that comprises the private equity funds. These are:

  1. Venture capital
  2. Buyout or leverages buyout 
  3. Venture capital (VC)

Venture capital private equity firms are generally defined as the pool of the funds or the capitals that generally tends to invest in start ups, early stage, or small business with more probability to progress well in future or those small business that are more likely to grow potentially but are having restricted access to other different types of the capital.

For start ups with innovation and ambitious value propositions, the venture capital VC private equity firms are the major source of fund in order to raise the capitals. Since the startups or the small business generally runs out of the funds, for their point of view, the VC funds are major source helping them to grow their business.

And from the point of view of the investors, they are getting the opportunity to get much profit returns. Though the risk for investing in the emerging business high but the chance for the extra ordinary return is also high.

  1. Buyout or leverages buyout

In contrast to the venture capital private equity funds, the buyouts or the leveraged buyouts tends to invest more in the mature business types. Though the returns in this kind of funds are less but the investor get the option to take the control over the interest. Leveraged buyouts firms generally invest a bigger amount in the mature or well performing businesses or the organizations in order increase their arte of returns. This is why the buyouts funds are comparatively bigger in comparison to the venture capitals.

Exit consideration 

After investing in the fund, the next step is to check the exit. There is need to consider multiple factors while checking for the exit strategy of the private equity funds. Multiple factors are present that impacts on the exit strategy of the private equity funds and thus in order to check it well, the investor should ask some of the below listed important questions:

  1. What will be the investment horizon? When does the exit requires to happen?
  2. Whether the management team is amenable or are ready to exit?
  3. What are the routes for the exit is available?
  4. Whether the existing capital structure of the business is appropriate or not?
  5. Whether the strategy of the business is appropriate or not?
  6. Who are significant buyers or acquires? Are the buyers or acquires of the private equity firm are another private equity firm or are the strategic buyers?
  7. What the buyers are expected to get the internal rate of returns (IRR)?

Typical routes for exit for the private equity funds

Whenever the private equity firms decide to exit, typically they choose one out of the two methods for exit and these are: total exit or the partial exit.

In the case of total exit from the private equity or the wholesale exit from the firm, there is either the compete trade sale to different buyer, or a share repurchase, or LBO by different private equity firms.

And, in the case of partial exit, there might be the case of private placement where different investor buys a small piece of the business. Another possibility in the partial exit includes the corporate restructuring. In this case of corporate restructuring, the external investors tries to get more involves and make efforts by acquiring the stake of the private equity firm partially in order to increase their position in the business. Another option of partial exit is corporate venturing where the management team itself increases their ownership in the organization.

In the last, IPO or the floatation is an hybrid strategy combined of both the partial as well as the total exit. In this case, the organization get list on the public stock exchange. In general, only s small fraction of the company gets sold on the IPO and the fraction ranges from 25 to 50 percent of the entire business. In the case when company get listed or get traded publically, the private equity firms start exiting form the company by gradually untying their left ownership stake persent in the business.

The bottom line

So these are all about the private equity funds, and their exit!



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