CAIA Level I: An Introduction to Core Topics in Alternative Investments, 2nd Edition

CHAPTER 21

Equity Types of Private Equity

Chapters 21 and 22 take a closer look at private equity investments. This chapter focuses on the two major types of equity securities that comprise private equity: venture capital (VC) and leveraged buyouts (LBOs). The next chapter focuses on debt securities that comprise private equity.

21.1 VENTURE CAPITAL VERSUS LBO

Venture capital and LBOs focus on opposite ends of the life cycle of a company. Whereas VC funds target nascent, start-up companies, LBOs 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 these different stages, and different product technology is found in each stage. For example, as a start-up, VC is necessary to get a prototype product or service out the door. In an LBO, the capital is necessary not for product development but to take the company private so that it can concentrate on maximizing operating efficiencies.

Despite their differences, both types of private equity seek to apply capital with activist equity ownership to improve the underlying company's chances for success. 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 ...