How Do Private Equity Firms Operate?

The working mechanism of private equity is quite similar to that of the venture capital however, there are certain differences as well. Venture capital is more focused on early-stage companies with high growth capital whereas private equity makes an investment on a much wider range of companies. These firms invest in companies, fuel its growth financially for first few years and trade it off for a substantial profit after some time.  

Private equity firms are no passive minority investors and expect a large stake in the business. These firms are more interested in taking the reins of the business in their hands. Growth capital in India is highly benefited by private equity firms in the country in past few years.

Here is how private equity deals are done in most countries. 

Leveraged buyout

In the case of “Leveraged buyout”, firms use their leverage or borrow their money to boost their returns. The firm usually borrows money from the banks or other lenders and later add money to its own funds or real estate funds to buy a major stake in the company. Leveraged buyout is a good way to reconstruct a company, make it more valuable and later sell all the stakes for profit.

Also known as turnaround deals, such deals help the companies when they are in financial trouble. The private equity firm uses its own money to boost the returns for the company. 

Growth capital

Contrary to leveraged buyout, In this case, the private equity firm takes a smaller stake and concentrates the growth around that part rather than the overall turnaround. Often regarded as the subset of private equity, it is very much similar to venture capital.

Growth capital or Growth equity is more focused on larger and mature companies and not the early stage companies.
    

Mezzanine Financing

The term may sound quite simple but it is actually quite simple. It is a form of debt that private equity firms take from companies. It is much riskier as it commands higher interest rate. If the company goes bankrupt, the debt gets paid off later than other debt.