February 02, 2023 • 3 min read • Private Equity

While there are many paths to funding new companies, private equity and venture funding are at the top of the list. As usual, the numbers tell the story.

According to Bain & Company, global private equity produced $1.7 trillion in buyout deals from January 1, 2021, to June 30, 2022. That figure represents the strongest 18-month period for private equity ever recorded. The venture capital sector also racked up impressive numbers. Data from IMARC shows the venture capital market will rise from $223.9 billion in 2022 to $708.6 billion by 2028 – an annual growth rate of 21.75%. Venture capital for health care alone stood at $49.7 billion in the first half of 2022.

While both of these markets are on a similar upward trajectory, there are plenty of distinctions between private equity and venture capital in definition, structure, usage, and management.

Distinctions Between Private Equity & Venture Capital

Private equity represents financial assets investing in a company that is not publicly traded. Venture capital also allows investors to steer cash into private companies, but with a twist. Venture capital assets typically fund startup businesses that demonstrate robust potential for steady growth, but start out small.

While both private equity and venture capital function to fund the growth of businesses, profit by taking a stake in companies that grow in value, and, ultimately, exit deals by selling their stake in the business, there is a significant difference in the size of the investments. 

Investment sizes differ, too. By a large margin, private equity deals add more cash to the funding table. According to Bain, the average U.S. private equity deal stood at $1 billion in the first half of 2022. Venture capital deals don’t usually pack such a powerful punch. According to a 2021 Statista study, the average early-stage venture capital deal locked in at $10 million. By primarily investing in mature companies, private equity departs from the smaller scale deals in the venture capital market.

Investment percentages differ, too. Private equity investors tend to take more of an “all in” funding approach compared to venture capital investors. It’s common to see private equity deals where investors take a majority stake in a company – often as much as 100%. That’s not the case with venture capital deals, where deals result in minority stakes for investors, often as low as 10%.

Investor make-up varies, too. Private equity investors are often big-ticket players such as hedge funds, pension funds, large institutional investors, and other accredited investors. In contrast, venture capital investors can range from high-net worth angel investors to investment bankers who may not have the deep pockets of a pension fund or big institutional investor.

Deal structures differ, too. While venture capital companies usually leverage money they’ve raised from external investors to fund deals, private equity firms rely on both equity and debt to finance their deals.

Risk-reward premiums differ, too. Venture capital companies tend to steer money into younger, relatively unproven companies. The risk-reward premium is more volatile than in the private equity sector. Investment return-wise, both private equity and venture capital investors aim for a higher internal rate of return (IRR) versus public markets. While private equity aims for a 20%+ IRR, venture capital investors, in return for the additional risk, typically aim for 30-40%+. Where those investment returns actually come from differs, too. With venture capital firms, the bulk of any investment return usually comes from the top companies in their portfolio. In contrast, private equity firms typically have a deeper bench, with a broad array of funded companies contributing returns.

Investing in private equity markets 

While access to private, alternative investments have previously been limited, the JOBS Act introduced in 2012 has loosened regulatory restrictions on raising capital for private investment companies. Access to private equity and venture capital investments are quickly making their way to the mainstream with the advent of asset-tech platforms, like Yieldwink. Investors can now easily access private investment offerings across all alternative silos: private equity, private real estate, and private credit. Typical investment minimums range from $25,000 to $50,000 – a great deal smaller than institutional requirements, some as high as $500,000.

 

 

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Yieldwink is a digital platform linking investors to highly vetted private investments in an effort to lower volatility, provide higher levels of income, and enhance returns.