Answered Essay: What are the major subcategories of private equity, and how do their investment approaches differ?

What are the major subcategories of private equity, and how do their investment approaches differ?

Expert Answer

The major subcategories of private equity are:

Leveraged buyouts- A transaction where a firm is purchased using a combination of both debt and equity, with the purchased firm’s cash flow acts as collateral for servicing the debt undertaken.

Venture capital- A form of financing where funding is lent to early stage start-ups which are deemed to have high growth potential. Venture capital is usually invested in return for equity in the start-up, which the investors hope to make good on when the company becomes hugely successful and goes public

Growth capital- Is used to refer to the activity of investing relatively lesser amounts of money in fairly mature enterprises to help them address their capital needs for expansion, restructuring exercises.

Distressed investments- These are typically high risk investments which are made by investors who believe that the distressed firm which is facing financial difficulties has the capability to turn around the situation if requisite capital is supplied. The downside being that the firm can go belly up and the investments would be worthless in that case.

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