Unlocking Potential: Understanding the Different Types of Private Equity Investments
Updated: Apr 23
Private equity is a type of investment where capital is invested in privately held companies that are not listed on a public stock exchange. This is done with the aim of acquiring a significant ownership stake in the company, usually with the intention of generating returns by improving the company's operations, increasing its value, and eventually selling it for a profit. Private equity investments are typically made by institutional investors or high net worth individuals who are
willing to take on a higher level of risk in exchange for potentially higher returns. The benefits of investing in private equity include the potential for strong returns and reduced risk through portfolio diversification. However, private equity investments are illiquid and require a long-term commitment, making them more suitable for sophisticated investors who have a high tolerance for risk.
There are five different types of Private Equity strategies: Venture Capital, Distressed, Growth Equity, Growth-Oriented, and Buyout, each having different risk-reward trade-offs.
Types of Private Equity Strategies
Venture Capital (VC): focuses on investing in early-stage startups with high growth potential. VC investments are typically high-risk, high-reward because the startups are in their early stages and have not yet established a proven track record. If successful, VC investments can generate significant returns for investors, but they also carry a higher risk of failure.
Distressed: involves investing in companies that are experiencing financial difficulties, such as bankruptcy or significant debt. Distressed investments are typically high-risk, high-reward because the companies are in a distressed financial situation, but they also offer the potential for significant returns if the investment is successful and the company is able to turn its financial situation around.
Growth Equity: focuses on investing in more established companies with proven business models that are looking to accelerate growth. Growth equity investments are typically less risky than VC investments because the companies are already established, but they still offer the potential for high returns.
Growth-Oriented: similar to growth equity investments in that they focus on investing in established companies with proven business models, but they also have a specific focus on investing in companies that are poised for growth in a particular industry or market. Growth-oriented investments typically offer moderate risk with the potential for higher returns.
Buyout: involves acquiring a controlling stake in a company, typically with the goal of improving its operations, cutting costs, and increasing profitability. Buyout investments are typically less risky than VC investments because the companies are already established and have a track record of generating revenue, but they also offer the potential for high returns if the investment is successful.
The return target for each private equity strategy can vary depending on the specific investment and the investment horizon. Here's a general overview of the return targets for each of the private equity strategies mentioned.
Return Targets of Private Equity Strategies
Venture Capital: typically have a high return target, with the goal of achieving returns of 20% or more per year over the life of the investment. This high return target is necessary to compensate for the high risk associated with early-stage startups.
Distressed: typically have a higher return target than other private equity strategies, with the goal of achieving returns of 20% or more per year over the life of the investment. This higher return target is necessary to compensate for the high risk associated with investing in distressed companies.
Growth Equity: typically have a return target of 15-25% per year over the life of the investment, depending on the specific investment and the growth potential of the company.
Growth-Oriented: also typically have a return target of 15-25% per year over the life of the investment, with a focus on investing in companies that are poised for growth in a particular industry or market.
Buyout: typically have a return target of 15-20% per year over the life of the investment, with the goal of improving the operations and profitability of the acquired company to generate returns for investors.
It's important to note that these return targets are general guidelines and can vary depending on the specific investment and the investment horizon. Additionally, private equity investments are illiquid and can take several years to generate returns, so investors should have a long-term investment horizon and be prepared to have their capital locked up for several years.
IIM Alternatives Platform
powered by Crystal Capital Partners
The IIM Alternatives Platform seeks to improve the risk-return profile of our client’s traditional investment portfolios through an allocation to private funds, including hedge funds, private equity, and private credit. Through the firm’s partnership with Crystal Capital Partners (CCP) clients have access to many of the industry’s largest and most well-recognized alternative investment funds, at significantly lower minimums.
The CCP investment team conducts an initial screen to identify institutional private fund managers that have displayed their ability in navigating multiple market cycles, have proven track records, enhanced risk management frameworks, and deep teams. The investment committee, which has been intact for over 25 years, then reviews the recommendations on an ongoing basis.
IIM provides a final layer of client specific analysis, delivering a custom recommendation based on current holdings and unique objectives. The result is a sophisticated and highly customized investment solution comprised of top institutional investment managers.
If you would like to learn more about how the IIM Alternatives Platform can enhance your current investment strategy please reach out to schedule an introduction meeting.
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INTENT INVESTMENT MANAGEMENT
Sources: Intent Investment Management; National Venture Capital Association (NVCA) - https://nvca.org/research/research-overview/performance-data/; Cambridge Associates - https://www.cambridgeassociates.com/wp-content/uploads/2019/03/Growth-Equity-US-Private-Equity-Index-2018-Year-End-Report.pdf; Bain & Company - https://www.bain.com/insights/private-equity-report-2021/; Preqin - https://www.preqin.com/