High school finance classes are a great way to learn about the world of investments. If you're learning about the stock market and how to invest your money, you may also be learning about private equity. What exactly is private equity? Put simply, private equity is a group of alternative forms of investing. There are many alternative forms of investments. Here are three of the most common types.
Leveraged buyout funds are used to obtain controlling interest in a company. Investors use a combination of funds to purchase companies that are in sound financial condition – meaning they're presently making money.
Investors that participate in leveraged buyouts use a combination of funds, including bank loans, equity in other companies, and personal funds. In most cases, the investors will use as little of their own money as possible. This limits the personal losses they may experience should the investment fail.
When Mitt Romney ran for president, he put venture capital funds in the spotlight. In fact, one of the companies that Mitt Romney was a partner in, invested in start-up businesses – businesses that have little equity but have the potential to earn significant money.
Venture capital funds are used to help new companies gain access to customers and partners that will maximize their earning potential. Most venture capital funds are divided into two groups – early stage funds and late stage funds.
Early Stage Funds
Companies that are starting up – or are in the early concept stage – often need funds to develop on their ideas. Early stage funds are used to develop talent and improve technology that will make the company more desirable to potential later stage investors.
Later Stage Funds
Once a start-up company has developed its talent and improved its consumer desirability, later stage funds will be used to make the company viable – or make it operational.
Growth Equity Funds
Companies that are looking to expand into other areas may look to growth equity investment funds for help with the expansion. In some cases, companies will scale back their normal operations to make room for expansion. When that happens, they may need additional funds for that new growth. Growth equity funds provide the financial stability a company will need while it ventures into other markets.
Private equity is a crucial aspect of corporate investments. Now that you're learning about investments in school, this guide will help you understand how private equity funds work.