Five essential differences between private equity and venture capital.

Private equity and venture capital are often confused because of the way both of them refer to firms that invest in companies and exit through selling investments in equity financing, including initial public offerings (IPOs). But the specifics paint a whole world of difference between the two—here are five to remember:

The companies they buy

Private equity firms largely buy mature, established companies. These might not be generating enough profits or are regressing, and they are bought in order to increase their revenues. On the other hand, venture capital firms put their money into startups that demonstrate high growth potential. While PE firms buy companies across all industries, VC firms are focused on technology, biotech, and clean tech investments.

Percentage acquired

PE firms nearly always buy 100 percent of a company, while VC firms acquire only a minority stake or less than 50 percent. While the former seeks to have total control of the firm after a buyout, the latter usually prefers to spread out risk and invest in different entities.

Amount of investment

PE firms invest at least $100 million in a single company. Venture capitalists, on the other hand, spend $10 million or less in each company, since they largely deal with startups with less predictable chances of success.

Focus

PE firms don’t maintain ownership for the long term, instead preparing for a level of exit strategy after a few years. They seek to improved upon an acquired business and sell it for a profit afterwards. Venture capitalists get involved in businesses’ earliest stages of operation, and it’s often the startup capital they provide that offers new businesses the means to become appealing to private equity buyers.

People

PE firms tend to attract former investment bankers, while VC firms obtain a more diverse mix such as product managers, bankers, consultants, and former entrepreneurs.

Scott Tominaga is PartnersAdmin LLC's Chief Operating Officer with over 17 years in the financial services industry. Read more about the finance industry on this page.

The basics of venture capitalism.

Keep in mind that two types of financing exist: equity and debt. The former refers to the investment a company gains in exchange for the investor having part-ownership of the business. Debt financing essentially means payment with interest.

Venture capital or VC comes in at the onset, referring to financial capital given to high-potential startup companies in exchange for equity. Venture capitalists provide the funds, while their firms oversee the sourcing of deals, making investment decisions, and maintaining the resulting portfolio.

There are different sources of capital to choose from, including so-called angels, micro seed funds, and growth equity. But venture capital is unique in that it works by utilizing medium funds that invest large amounts of capital to gain equally large amounts of equity.

The process of gaining venture capital begins with an entrepreneur getting introduced to various VC firms. The entrepreneur then pitches their business to the said firms, provides them with term sheets should they decide to invest, then cultivate the business relationship through time. The final step is the repayment of the venture capitalist(s) through IPO, acquisition, and even bankruptcy, should the business fail.
Venture capital often plays a major role in the stage of a company’s lifecycle wherein the business is beginning to commercialize its innovation, especially as it now builds the needed infrastructure (manufacturing, sales, marketing) to grow the business.

PartnersAdmin LLC’s Chief Operating Officer Scott Tominaga has worked in the hedge fund and financial services industry for over 17 years. His company was established in 2008 with the intent of providing quality, outsourced solutions that meet the dynamic back office needs of the alternative fund industry. For similar posts, check out this blog.

Understanding the fee structure of hedge funds

When investing in a hedge fund, investors place their money and their trust in the hands of fund managers, which can come in the form of a general or limited partnership or a limited liability company. They are compensated for their service with a fee structure that commonly consists of the following:

Management fee
Whether a hedge fund endeavor pans out and performs well or not, the fund managers are paid with a management fee with a value that falls between 1 and 2 percent of the amount of the assets that are managed. There are even cases that this rate goes higher, especially if the fund manager has a proven track record.

Performance fee
Also called incentive fee, hedge fund managers are paid a percentage of the total profits that their endeavors gain. This serves as a reward for excellent performance. Most fund managers collect 2 percent of the net asset value and 20 percent of the profits as part of the “2 and 20” fee structure. However, like management fee, fund managers can collect a higher performance fee rate.

Many fund managers implement the high-water mark clause, which prevents managers that suffered from hedge fund losses in the previous years from charging a performance fee on new profits to offset the said negative gains.

Scott Tominaga is a renowned expert in the hedge fund industry. He has more than 17 years of experience in the field, as well as in financial services. For more articles like this, click here.

Emerging financial services trends shaping the industry.

The financial services industry is one of the first to be directly affected by innovations and disruptions in technology. This is especially true in the internet age, when cybersecurity and investment protection are of prime concern.

A key trend to pay attention to is cybersecurity investment. As the 2020s approaches, many banks are channeling their resources to security infrastructure, especially with rampant cyber-attacks. A recent study by the Cybersecurity Market Reports predicts that one trillion dollars will be allocated to cybersecurity alone between this year and 2021.

Corporate banking is also seen to invest more in client-oriented technologies, as competition for offering the best customer experiences goes up. Digital solutions are being developed in line with the rise of cryptocurrency and blockchain technology. Also, loan expansion strategies will target the middle market more and should lead to significant increases in revenue in the coming years.

As Fintech continues to gain ground, its investment values will rise accordingly. Such numbers are seen to go up to as much as $4.7 billion by the end of 2018. This is coupled with the speedy deployment of automation strategies. The goal of such a move toward robotic processes is increased productivity and overall efficiency internally while delivering optimal customer service.

Scott Tominaga is the Chief Operating Officer of PartnersAdmin, LLC. He has almost two decades of experience in the hedge fund and financial services industry. Read more about the financial services industry here.