Building generational wealth can seem like a lofty challenge in the current economic climate with record inflation levels, high government spending, and the constant threat of the ongoing pandemic. But, as daunting as the present situation appears, private equity investments continue to offer inventive solutions for savvy investors interested in increasing capital with an innovative investment strategy.
Venture Capital Investments
Venture capital continues to be one of the most popular investment strategies worldwide. While primarily associated with the technology sector, venture capital investments provide funding for new and emerging companies demonstrating high growth potential. Venture capital is a high-risk, high-reward strategy for acquisitions, but it offers an active role for those looking to keep a close eye on private investments.
Leveraged Buyout
With a leveraged buyout private investment, or LBO, the investor or investment company acquires controlling interest in another company using borrowed capital. Businesses often use this strategy to spin part of the original company into a separate enterprise or to take a previously public company private. Leveraged buyouts typically occur when a company management team member uses equity and debt to secure funding.
Mezzanine loans are a standard part of a leveraged buyout agreement. The structure of these loans makes them a valuable option for companies as they do not need to be repaid until the end of the loan term, providing the business with working capital for day-to-day expenses.
Growth Capital Investments
Venture capital and LBO investments are more common with newer businesses, but growth capital investments are for mature, well-established companies with a proven business model. Companies use this form of financing for development and expansion as outlined in their business plan. Any assets acquired must go toward specific growth strategy obligations such as sales and marketing or developing future partnerships.
The Differences Between Private Equity and Public Equity
When businesses need to secure working capital, public and private equity are options, and each has advantages depending on specific funding needs. Public equity is stock shares or equity available for anyone to purchase on a stock exchange. Stock in a public company is liquidated or sold at the shareholder’s discretion. Many businesses offer this type of stock to employees as part of a larger compensation package. Investments in public equity firms are considered less risky.
Private equity operates with no public exchange trading. These companies obtain capital through a limited number of private equity firms or partners known as accredited investors. For consideration as an accredited investor, an individual or business must meet specific guidelines set up by the Securities and Exchange Commission (SEC), an agency established to enforce laws against market manipulation and to ensure fair and honest treatment of investors.
Achieving status as an accredited investor demands an individual receipt of $200,000 in gross income for the prior two years, or $300,000 in gross income if qualifying with a spouse or partner. There must also be a reasonable expectation for meeting the same income limitations in the current year. Individuals not meeting the income requirement may still qualify if they possess a net worth over $1,000,000 not including the primary residence.
Qualification as an accredited investor provides special status under financial regulation laws and allows the person or entity to invest in securities outside the regulations set up by the SEC.
