PRIVATE EQUITY
Private Equity (PE) is an asset class that invests in the equity of an unlisted company. Depending on the investment type, a PE-corporation becomes either a minority or a majority shareholder. In contrast to debt capital, PE takes full responsibility for profits and losses of the invested company. Thus, there is a higher rate of risk, while there is on the other hand a potential for bigger gains.
Alongside the pure investment activity, a PE-corporation supports the company with its management knowledge to realize potential efficiency gains. Hence, it becomes obvious that PE investments focus on the long-run.
Due to the long-run perspective of the investment one has to be cautious about the j-curve effect. That means that due to fees and capital calls, the investment produces negative cash-flows in the short-run but higher profits in the long-run. Therefore, one can expect the first returns after a couple of years. For investors who need periodic payments, this asset class may cause some problems.
The performance of this asset class is nevertheless remarkable. According to a Preqin report, the median IRR of all closed PE funds of the last 3 years in 2014 was about 16%. The IRRs of course vary between the different strategies and different risks.
Buy-Out
Buy-out investments engage in already established companies. This type of investment occurs quite often in situations when there is uncertainty about succession or simply the owners want to sell their business. The goal of an investor is to enhance the operative efficiency through restructuring and sell the company with a profit.
Growth
With Growth Capital an investor invests in a company, which further developed, has a product line and already earns a profit. These companies are in the need for capital to make it to the next level. The investor makes its profit due to the growth potential of the company.
Venture Capital
Venture Capital is also known as risk-capital. It is usually invested in companies which are in their founding phase. Thus, there exists a high risk of a default but also a chance for high returns.
