Difference between Private equity and Venture Capital

The terms Private equity and Venture capital is often confused by most.That isbecause both of the terms refer to firms that invest in companies and exit by selling off their investments made in equity financing. However they are different from each other in major sectors.

The greatest difference is in the way the firms involved under these types of funds operate.Both Private equity and Venture capital buy different types of companies and the company size differ from each other too. Different amount of money is involved when it comes to investment and the percentages they claim of equity in the companies is different again. Certain Indian investors in Private equity consider Real Estate in India to be a separate asset class altogether.

Private equity firms are more into buying mature and established companies that are likely to stay in the industry. Private equity firms buy these type of companies and reduce and control operations to increase the revenues. On the other hand, Venture capital firmsare mostly found investing in start-ups which have a promising future and potential to grow.

The companies in which Private equity firms invest, they buy its complete ownership as well. The companies hence are in total control of the firm after they have been bought.Venture capital firms would invest in 50% or even less of the equity of the companies.  Mostly, they prefer to distribute their risk and invest in several companies. For example, if one of the start-up companies cannot return their investment, the entire fund does not go haywire.

The Private equity firms have no restrictions on buying companies from a specific industry. They can choose to buy any. While Venture capital firms have confined options from start-ups in the sector of technology, biotechnology, etc. Also, Private equity firms are free to use both cash and debt while investing, but venture capital firms deal with equity only.