Private Equity vs Venture Capital

There are two ways for company owners to get the money they need to operate or expand their enterprises: venture capital and private equity. Capital invested in a business that is not publicly listed or traded is known as private equity (PE). Funding for startups or other young enterprises that have significant potential for long-term development is known as venture capital (VC). Because both terms relate to businesses that invest in companies and exit by selling their stakes, sometimes in initial public offerings, private equity and venture capital are occasionally confused (IPOs).

Private equity and venture capital firms initially have a lot in common: they both invest in businesses and leave when the time is right, producing enticing rewards. The businesses that are engaged in the two sources of finance, however, operate quite differently. Private equity and venture capital firms make investments in a variety of various kinds and sizes of businesses. They also make financial commitments of varying proportions and stake ownership stakes in the businesses they invest in.

What is PE, or private equity?

Private equity (PE) is a category of alternative investment in which funds from wealthy people and investment corporations are invested directly in privately held businesses.

Experts in their industries, private equity investors often concentrate on mature businesses that are beyond the development stage or businesses that are suffering as a result of operational inefficiencies. The money comes from institutional and individual investors, which the company then uses to expand, make bolt-on acquisitions, seek growth opportunities, or increase cash flow. The portfolio firm of private equity funds might also benefit from mentoring opportunities. To learn the names of the top 10 PE firms according to AUM, get the free download.

What is VC, or venture capital?

Small businesses or startup companies that provide a novel idea and potential futures may get venture capital (VC) from investors or people in return for a minority ownership. New private enterprises that are unable to seek money from the public are especially the target of venture capital investments.

Technically speaking, private equity includes venture capital as a subsegment. Venture capitalists make investments in private businesses, similar to private equity investors. A venture investor favours businesses with extraordinary development potential, whether as a result of early success, a successful founding team, or a particularly avant-garde idea.

Education

Mid-sized and big PE companies are more likely to recruit investment bankers at the junior levels, and applicants should have a  bachelors degree in an analytical field like finance, accounting, statistics, mathematics, or economics from a prestigious institution.

Company development specialists, product managers, consultants, past business owners, and even bankers are among the professions that VCs attract. Most venture capitalists have at least a bachelors degree in business, which gives them the knowledge and abilities needed to analyse and understand company proposals. A key competency for an investor is this.

The lack of chances for recent graduates to work for VC and PE companies is a shared characteristic. Since both demand technical expertise, a network, and industry knowledge, both want employees with between two and three years of experience. Investment banking experience is quite important.

Skills

Private equity requires more technical work since it takes longer to coordinate transactions, and the working atmosphere is somewhat similar to banking. Private equity fund management involves analytical skills, a background in banking, consulting, or business development, as well as the technical capacity to assess financial performance and evaluate private companies. Additionally required are research skills, financial modelling abilities, and industry understanding.

People from various walks of life may discover opportunity in venture capital. Good trading experience, effective communication abilities, and the capacity to identify investment possibilities are prerequisites. It helps if you are well-versed in the domains of technology, biotechnology, or healthcare and can persuade employers that you are enthusiastic about a variety of businesses, including start-ups. Additionally, you be continuously sourcing transactions, talking with coworkers and supervisors, and dealing with the management of portfolio firms, so great communication and interpersonal skills are essential. Project management, analytical and organizational abilities, a strong work ethic, the capacity to successfully handle several activities at once, and knowledge with financial records are additional crucial traits.

Certification/Courses

From in-depth financial statement analysis to arranging challenging add-on acquisitions in a leveraged buyout, private equity demands specialized technical abilities. Enrol in our online private equity course to learn these fundamentals and get a degree that is recognized by Wall Street.

The certified financial analyst (CFA) accreditation, chartered private equity professional (CPEP), chartered investment & management accountant (CIMA), and financial risk manager designations are a few more financial credentials that might assist you enter into private equity (FRM).

Although there isn't a specific certification for venture capital associates, the chartered financial analyst designation (CFA, administered by the CFA Institute), chartered alternative investment analyst (Chartered Alternative Investment Analyst Association), certified investment management analyst (Investments & Wealth Institute), and certified treasury professional may be useful.

Hours

Professionals in private equity must be very competitive, put in long hours, and exercise critical thinking. They ought to be passionate about business investment.

Venture capital is more qualitative, includes more networking events and meetings, and has more flexible working hours.

Salary

In PE compared to VC, the basic pay, bonus, and carried interest are all greater.

Private equity pays greater management fees since the funds they manage are larger, which results in better earnings at all levels. In the US, a first-year associate with a PE company may make between $200,000 and $300,000. At a bigger PE company, junior partner salaries might range from $400,000 to $600,000. In general, private equity is for you if you want to earn the greatest money in the quickest period of time.

Compared to private equity, venture capital offers first-year associate compensation that are 30 to 50 percent lower. All you have to do to succeed in venture capital is identify the next Google. A junior partner might expect to make between $400,000 and $600,000 at big, very successful VC companies. But this is really unusual.

Work-Life Balance

Overall, contrasted to venture capital, where the approach is much more of a "normal" workweek, typical private equity companies have longer working hours. This is due to the fact that procedures and time to term sheets in VC are quicker than in PE, and decisions to proceed with a transaction may sometimes be reached in weeks as opposed to months in typical PE.

The culture of private equity is similar to that of investment banking, with long hours (60 to 80 hours a week), a strong deal-making emphasis, and extensive technical analysis (financial modelling, etc.). When there are no transactions to complete and there are, a PE analyst might anticipate working 100 hours per week.

The hours are shorter at VC companies than at banks. The job is also more qualitative and focused more on meetings and networking; venture capital hours are more slack (about 50 to 60 hours per week). When a transaction has to be completed, the hours do, however, get longer.

Career Paths

Analyst, associate (including pre-MBA associate and post-MBA associate), vice president, director or principle, managing director (MD), or partner are all possible career paths in private equity.

Analyst, associate (including pre- and post-MBA associate), principle or VP, partner or junior partner, senior partner, or general partner are all possible career pathways in venture capital.

Exit Opportunities

If you work in PE, you probably won't leave it or go into another position that requires you to work on agreements. Working in venture capital (VC) prepares you for jobs in startups, operational roles, and other VC companies.

PE Exit Possibilities:

Enter a hedge fund: You can produce a respectable ROI in a lot less time.

Change to venture capital: The thrill of participating in the early phases of a potential new firm is evident, even if the risk-reward ratio may not be as alluring.

When they start working for a firm, many private equity workers take on a senior position with one of their portfolio companies, either in the C-suite or in an advising capacity like Head of Business Development.

VC Exit Possibilities

IPO: During an IPO, you may create a return and quit the company by selling your shares to underwriters.

Mergers and Acquisitions (M&A): Joining forces with similar businesses is an excellent strategy to pool resources and get rid of rivals. Additionally, it gives VCs an opportunity to profit from the other firm in the M&A deal.

Share buyback: While it may not be practical for many businesses to simply purchase all of your shares, this might be an option for bigger businesses. 

Sale to a Venture Capital Fund or Other Strategic Investor.