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What are the Different Types of Private Equity Funding?

By Justin Riche
Updated May 17, 2024
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Private equity funding comes in various forms, including the purchasing of equity securities and providing venture capital, growth capital and mezzanine capital. Each one of these types of funding is carried out in specific situations to reach particular aims. In many cases, private equity funding is provided by private equity firms or funds that are made up of groups of investors who have pooled together money in order to make certain types of investments. Such investments include providing funds to startup businesses, established and growing companies, private companies and public companies that they usually turn private and then possibly take public again at a later date.

In the realm of private equity funding, investors normally provide necessary financing to take control of companies. They can purchase equity securities, which entitle them an ownership share in the company whose equities they bought. When this transaction takes place, investors will give a certain amount of money to the company, and they gain an appropriate share of the company in return. The money received is used to finance particular activities, which have the end goal of making more profits for the company. If and when the venture is successful, the investors normally are compensated by their shares' increase in value.

Private equity firms sometimes buy businesses in what are called leveraged buyouts (LBOs). LBOs are funded by a large amount of debt. These transactions often mean that the assets of the businesses being bought, together with those of the firms doing the buying, will be used as collateral.

Startup businesses usually are too small to be able to raise capital by issuing stocks or bonds to the public. Often, banks do not like to provide financing for these ventures as well, and thus their owners usually will turn to private equity funding. This is because startup companies usually do not have substantial earnings and thus are extremely risky, but for private equity firms, the companies might look very promising.

For various reasons, companies sometimes become financially distressed, and continuing certain activities becomes impossible. Private equity firms sometimes find good opportunities when such situations occur, and that is when they make what are known as distressed investments. Essentially, when they make these investments, they can take control of the distressed company and do what they can to ensure that a profit can be made.

Established companies that desire to grow and expand further can attract private equity funding, which can come in what is known as mezzanine capital. Generally, mezzanine capital is a form of debt that is between secured debt and equity. Typically, mezzanine debt financing has no collateral backing it, meaning that it presents more risk to the investors who provide it, which is why they normally ask for a higher return. By furnishing mezzanine capital, the investor might be given an option to convert this form of debt into equity under specific circumstances.

Moreover, private equity funding can be made through investments on the secondary market. Typically, many private equity transactions require that investors stay committed to overseeing their investments for a specified period, which can be very long. A secondary market allows investors to get out of their commitments before the end of the particular period, which allows other investors to enter.

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