Alternative Investments: CAIA Level I, 3rd Edition

CHAPTER 23 Equity Types of Private Equity

Chapters 23 and 24 take a closer look at private equity investments. This chapter focuses on the two major types of equity securities that compose private equity: venture capital (VC) and buyouts. The next chapter focuses on debt securities that are often classified as private equity.

23.1 Contrasts between Venture Capital and Buyouts

Venture capital and buyouts focus on opposite ends of the life cycle of a company. Whereas VC funds target nascent, start-up companies, buyouts target more established and mature companies. Corporations tend to experience three stages in their lives: a start-up stage, a growth stage, and a stable or mature stage. Different financing needs are required for each of these stages, and different product technology is found at each stage. For example, as a start-up, VC is necessary to get a prototype product or service out the door. With a buyout, capital is necessary not for product development but to take the company private so that it can concentrate on maximizing operating efficiencies.

In terms of company characteristics, start-up companies generally have a new or innovative technology that can be exploited with the right amount of capital. The management of the company is typically idea driven rather than operations driven. A proven revenue model may not yet be established, and the capital consumption is probably high. Conversely, with a buyout, there is an established product. The management of the ...