The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly

Chapter 8. Private Equity (Venture Capital)

The Term private equity is often used to describe various types of privately placed, as opposed to publicly traded, investments. Within the broad category of private equity are three major subcategories: venture capital, leveraged buyouts (LBOs), and mezzanine financing. Even the name of this alternative asset class is tantalizing because of its allusion to privately available opportunities. Individual investors may even yearn to be "players" in an arena dominated by institutional investors such as the Yale Endowment. This may explain why private equity is among the most popular alternative investments for individuals.

The private equity market has grown tremendously over the past twenty-five years. In 1980, investors had committed $5 billion to this alternative investment. By 2004, that figure had swelled to a total of $300 billion.^[62] According to the National Venture Capital Association, 248 venture capital firms raised a total of $35.9 billion of new funding for private equity in 2007.^[63] What accounts for this spectacular growth?

Origins

The original source of the term venture capital (VC) is unknown. However, it is generally accepted that the VC industry, as we know it today, was launched in 1946, when General Georges Doriot, Ralph Flanders, Karl Compton, Merrill Griswold, and other partners organized American Research and Development Corporation to invest in the illiquid equity or equity-related securities (i.e., convertible preferred ...