What are Investments?
In private equity, investments can refer to two different types of investment strategy: venture capital and leveraged buyout. Venture capital is typically for financing new, fledgling companies with high growth potential, such as the next Facebook, though this can also be used more broadly to refer to start-up investing. As observed by Fintalent’s investments consultants, leveraged buyout investments are generally aimed at entire companies with established revenues that need refinancing.
Venture capital investments can either be a secondary transaction (also called a secondary buyout), or they can be early-stage financing that is provided to help startup companies get started. The later investment, called venture capital financing, is also sometimes called start-up financing. In either case, an investor will provide the startup company with funds in exchange for some equity in the company and a stake in the profit.
When an investor invests in a company, he or she is said to take part ownership of the company, called equity ownership. The equity owner receives a share in the profits made by the company as well as a say in how that company is run. Equity ownership can be used to entice investors by offering them shares of the company and its future profits, or it can add to the fixed value of an investment.
The second type of private equity investment is known as a leveraged buyout, or LBO for short. This strategy of investing involves taking an entire company, paying for it with little or no cash up front and using money borrowed from banks and institutional investors to complete the transaction. The investors then work with management and/or existing owners in order to improve efficiency and increase revenue streams, which will hopefully lead to an increase in profit margins. Once the company is operating successfully, the investors can sell the company for a profit. The money will be split between the lenders who financed the initial buyout and any remaining equity owners.
