According to the Spanish Association of Capital, Growth and Investment (ASCRI), Private Equity can be divided into Venture Capital and Private Equity, both have in common that they are third-party capital contributions to companies that they consider disruptive or with a lot of growth potential, but how are they different? What exactly are they? We then rely on the definitions of ASCRI to explain these two major concepts of private investment:
What is Venture Capital?In ASCRI they define the Venture Capital as the investment of capital in a company that is in its initial or very early development phase. Normally, Venture Capital investment is aimed at technology companies or companies with a strong innovator/disruptive component. This type of investment does not require large amounts of capital, but its risk is greater since there are no historical results of the company to which the investment is intended, nor is it certain how the product or service will be accepted by the market. In turn, Venture Capital investment can be divided into three subtypes:
- Seed Capital: Understood as very early investment in business ideas or newly created companies with a service or product yet to be launched on the market.
- Start-up Capital or Start up Capital: investment for the establishment of the company (registration of the company, website, office) and the start of its activity. The capital contributed is greater than in seed capital investments since it is understood that their cash requirements are greater.
- Other early stage: When the startup is already in a more advanced phase, it can be eligible to receive larger rounds of funding.
What is Private Equity?
On the other hand, the Spanish Association of Capital, Growth and Investment, considers Private Equity to investment aimed at companies in growth stages or already consolidated. In this sense, Private Equity is divided into four types:
- Expansion or development capital, also called Growth Capital: Financing refers to the growth of a company that already has profits. The destination of the funds can be used to acquire fixed assets, increase working capital for the development of new products or access to new markets (expansion plans). These are investments of greater volume than those of Venture Capital and of lower uncertainty since there is historical data on the company and its sales.
- Replacement Capital: understood as the replacement of part of the current shareholding by the venture capital institution. This is a very common situation in family businesses or those that are in succession. It can also occur in some opportunities for the sale of assets or non-strategic branches of activity of very large companies, where their managers or other outsiders seek greater financial support in venture capital.
- Leveraged Trading or LBO: the purchase of companies in which a substantial part of the transaction price is financed with external resources, guaranteed by the acquired company's own assets and by the capital provided by the investors in the transaction. In these transactions, it is most common for the target company to have cash flows that are consistent, stable and high enough to be able to meet the interest paid on the amortization of the principal of the debt.
- Restructuring or reorientation capital, also referred to as Turnaround: when investing in companies that are going through difficult times for a long period of time and are in need of financial resources to be able to implement major transformations that allow them to survive, the funds that are invested are considered restructuring capital.
Source: ASCRI
