Difference in Focus: How Private Equity and Venture Capital Firms Differ

July, 2020

Most people are aware of the terms Private Equity and Venture Capital. You may know the traditional definitions and wonder why you should continue. Well, change is a constant factor and as such, so have the activities that Private Equity firms and Venture Capital firms engage in changed. While both have an end goal of turning a profit, it is the subtle differences that will separate the two.

Spotlight on Private Equity Firms and the Most Notable Performers

 

As you may already know, Private Equity firms usually put money in businesses that are having trouble due to inefficiencies with the assumption that once those are straightened out, the companies can go back to turning a profit. This is what you may already know, if not from the field, then just by watching the 1987 movie Wall Street. Today, private equity has evolved. It not only focuses on mature or inefficient businesses, but on various other strategies such as real estate, growth capital, and of course venture capital.

 

The largest private equity fund is The Blackstone Group, founded in 1985 by former Lehman Brothers executives Peter Peterson and Stephen Schwarzman with a seed capital of $400,000. This reputed firm as of 2019 has $545 billion of assets under management (AUM). Their ability to find and execute the right opportunities, and adapt with change, has played a significant role in their success.

 

Another well-known PE firm is The Carlyle Group. Founded in 1987, the firm employs more than 1,775 people in 32 offices across six continents. As of Dec. 31, 2019, The Carlyle Group had an AUM of $224 billion.

Kohlberg Kravis Roberts & Co (KKR & Co.) was founded in 1976 by former Bear Sterns employees Jerome Kohlberg, Jr., Henry Kravis and George R. Roberts. Like much of the PE firms today, KKR & Co. manages multiple alternative asset classes, including private equity, energy, infrastructure, real estate and credit, with strategic partners that manage hedge funds. The firm had an AUM of $218.4 billion as of Dec. 31, 2019, with their private equity portfolio appreciating 27% in the year.

CVC Capital Partners is based in Luxembourg and has about US$111 billion in secured commitments since inception in 1981. It manages $75 billion of assets. It was established as the European arm of Citicorp Venture Capital (CVC) It has invested in more than 300 companies worldwide.

The Venture Capital Space: Notable Performers

Now you know that private equity is a very broad term, representing anything where the asset is not traded on public markets. As expected, venture capital (VC) comes is a part of private equity. The niche focus it represents is actually gave rise to companies such as Google, Facebook, and Amazon. Venture capital firms provide funding for startups. Much of this in recent times has been technology focused. The companies they invest in can range from a conceptual stage to a growth stage. While PE activities, excluding VC, are about having significant stakes and control, venture capital firms tend to take minority stakes in companies and are focused on long-run growth. While there are numerous ways investors can make money, all are dependent on the company’s growth. Ideally, investors want to sell their stake when the companies are successfully acquired or go public. However, one important thing to note is that VC investments tend to have more risk associated. Keep this in mind if you ever engage in crowdfunding startups in exchange for shares of the company.

 

Among the top performers in the venture capital space are firms ‎Sequoia Capital and Andreessen Horowitz. 

Sequoia Capital was founded in 1972 and has partnered with several companies at early and every stage of growth. They are the most well-known VC firm around the globe due to their ability to consistently recognize good ideas and help the businesses grow. These companies now have a public market value of over $3.3 trillion.

Andreessen Horowitz is a private American venture capital firm, founded in 2009 by Marc Andreessen and Ben Horowitz. Some of the companies they had a hand in are Instagram, Skype, and Viki. The firm has $10 billion in assets under management across multiple funds, including the $650 million Bio funds, the $350 million Crypto fund, and the Cultural Leadership Fund. What makes Andreessen Horowitz popular is their contrarian approach, which has allowed them to recognize ideas relevant for the future before most other firms.

Final Thoughts

It’s easy to understand that VC is for startups and PE is for everything else. In fact, that’s what many of us have learned. However, it is important to know that as times have changed, so does the accuracy of this understanding. To be successful investors, one must understand opportunity and execution. With the basics clear, understanding why and how these firms are successful becomes easier.