Private equity firms commonly deploy various strategic approaches to achieve their investment objectives. These strategies encompass A) leverage buyouts, B) growth capital investments, C) venture capital initiatives, D) secondaries, and E) fund of funds structures.
A) Leverage Buyout (LBO)
Leverage Buyout is the most prevalent strategy, involving equity investments in transactions where a company, business unit, or business assets are acquired from existing shareholders, typically using financial leverage. Such transactions typically involve mature companies with established operating cash flows.
Private equity firms categorize target companies as either platform companies, possessing sufficient scale and a self-sustaining businessmodel, or as add-ons.
Examples: Mediq, Roompot/Landal.
B) Growth Capital
Growth capital refers to equity investments in relatively mature companies seeking capital for expansion, operational restructuring, market entry, or major acquisitions.
Companies pursuing growth capital often do so to finance transformative events in their life cycle. These companies are typically more mature than those funded by venture capital, capable of generating revenue and operating profits but insufficient cash for expansions or further investments.
Examples: Action, Partou.
C) Venture Capital
Venture capital, a broad subcategory of private equity, involves equity investments in less mature companies, typically for the launch of a seed or startup, early-stage development, or business expansion. These investments are commonly directed towards new technologies, marketing concepts, or products without a proven track record or stable revenue streams.
Examples: Airbnb, Skype.
D) Secondaries
Secondary investments pertain to investments in existing private equity assets. These transactions may involve the acquisition of private equity fund interests/participations or portfolios of direct investments in privately held companies from existing institutional investors.
Secondaries present a different cashflow profile, diminishing the J-curve effect associated with new private equity fund investments.
Examples: Glendower Capital.
E) Fund of Funds
Investments of a fund whose primary activity is investing in other private equity funds. This model is favored by investors seeking:
- Diversification when lacking the capital for individual portfolio diversification.
- Lower Risk because of increased diversification
- Access to top-performing funds that are otherwise oversubscribed.
- Expertise in a specific fund type or strategy.
- Exposure to difficult to reach markets or niches.
- Superior fund selection facilitated by highly skilled fund of fund managers and teams.
Examples: Reachfund, Marktlink Capital.
