This article is intended not for finance professionals but for those starting their first startup, who have little to no understanding of what the financial instrument Private Equity is, its main types, and how it can be utilized.

Private equity refers to a type of business operation where all company assets are first transferred to a private individual, then undergo restructuring, and finally (if necessary) the company is put up for sale.

Thus, the chain of actions looks like this:

transfer to private ownership — restructuring (most often, its main method is cost reduction allocated for further business operations) — sale.

Private equity consists of two main elements:

• equity securities;
• debt obligations in operating companies.

It should be noted that neither of these is freely available on the stock market.

Investments in shares can be made by:

• private investment firms,
• venture firms;
• angel investors.

Each investor not only pursues their own goals but also prefers their specific type of investment strategy.

The key features of managing private equity include:

• Using funds from private individuals;
• Utilizing hedge fund resources;
• Employing pension funds for financing;
• Using university endowments;

Private equity is most often acquired using borrowed funds, as this provides significant tax benefits.

Primary investment strategies:

• leveraged buyouts,
• venture capital,
• growth capital,
• distressed investments,
• mezzanine capital.

Let's delve into each of the strategies in more detail.

Leveraged buyouts

This strategy implies that the buyer (also referred to as a financial sponsor) acquires private equity using funds from companies or private individuals, with part of the future profits allocated to repay the loan. This is the most commonly used strategy and is considered to be the least risky since the investor provides only their capital for the acquisition plus the profit for the investor will increase (as long as the return on assets exceeds the cost of debt).

Growth capital

This strategy involves acquiring shares of relatively mature companies seeking capital for expansion or restructuring operations, entering new markets, financing a major acquisition, etc. In turn, the company owner using private equity avoids risk by obtaining part of the company's value or restructuring part of the debt if the company has significant financial obligations.

Mezzanine capital

This type of capital can be expressed as:

• subordinated debt obligations, as well as
• preferred equity securities

This strategy is relevant for small companies that cannot quickly access high-yield markets. This capital is used to reduce collateral or for significant refinancing of the company. It acts as additional capital, as banks are often unwilling to provide substantial credit amounts to small companies.

Venture capital

This strategy involves investing in the equity of less mature companies. The main goals of using venture capital may include:

• company development,
• business expansion.

Essentially, this is an investment in the development of “startups,” which may aim to develop new technologies, test marketing concepts, or evaluate new products.

Venture capital is best suited for enterprises with high initial capital requirements, typically investing in “fast-growing” sectors such as healthcare, biotechnology, robotics, and IT.

Distressed securities

This strategy, which includes several others, involves investing using shares or debt securities of companies facing serious financial difficulties.

In general, this strategy is divided into two main sub-strategies:

• “Distressed control” strategies or “owner loans”;
• “Special situations” or “turnaround” strategies.

The first involves acquiring debt securities in the hope of exiting corporate restructuring with control over the company’s equity.

The second includes providing debt and equity investments for companies experiencing significant financial issues.

Secondaries

This type of investment implies investing in already established investments by purchasing shares of a private equity fund or portfolios of direct investments. This is possible because direct investments are illiquid; essentially, their primary purpose is to create long-term investments for investors through buying and holding shares or company portfolios. Secondary investments provide an opportunity to improve this situation.

Other frequently used strategies

Other types of strategies include:

• Investing capital in real estate;
• Investing in infrastructure assets such as bridges, tunnels, toll roads, airports, public transport, etc.;
• Investing private capital in energy assets, such as energy production and sales, including fuel extraction;
• Investing in bank products in the form of unregistered securities;
• Investing in private equity funds;
• Investing in difficult-to-access or emerging markets;
• Investing in royalty streams, which are widely used in copyright inventions, for example.

Let's consider the 10 most well-known private equity firms (listed in descending order of investment):

1. Blackstone Group
2. Sycamore Partners
3. Kohlberg Kravis Roberts
4. Carlyle Group
5. TPG Capital
6. Warburg Pincus
7. Advent International Corporation
8. Apollo Global Management
9. Encap Investments
10. CVC Capital Partners

The article turned out to be somewhat more complex than we had anticipated. But do not worry, the financial specialists at US Business Services Corp. will help clarify all the intricacies of this type of investment.