Technically, venture capital is just a subset of private equity.

They both invest in companies, they both recruit former bankers, and they both make money from investments rather than advisory fees.

But if you take a look beneath the surface, you’ll see that they’re significantly different.

Definitions

Technically, the term “private equity” refers to money invested in private companies, or companies that become private through the investment.

Most people in finance, though, use “private equity” to mean firms that buy companies through leveraged buyouts (LBOs) – so that’s how we’ll use it here.

There are a couple other categories of PE, so we’ll look at those at the end of this article.

What They Do

While both PE firms and VCs invest in companies and make money by exiting – selling their investments – they do it in different ways:

• Company Types: PE firms buy companies across all industries, whereas VCs are focused on technology, bio-tech, and clean-tech.
• % Acquired: PE firms almost always buy 100% of a company in an LBO, whereasVCs only acquire a minority stake – less than 50%.
• Size: PE firms make large investments – at least $100 million up into the tens of billions for large companies. VC investments are much smaller – often below $10 million for early-stage companies.
• Structure: VC firms use only equity whereas PE firms use a combination of equity and debt.
• Stage: PE firms buy mature, public companies whereas VCs invest mostly in early-stage – sometimes pre-revenue – companies.

The MERGERS & INQUISITIONS article is by Brian DeChesare.