Private equity capital includes funds an individual or business obtains from sources outside of traditional banks or stock markets. These funds often come from venture capitalists, private investment firms or wealthy individual investors. The most common types of private equity include venture, growth and mezzanine capital. To secure this money, companies will often enter into legal agreements regarding the repayment date and process for the funds, collateral in case of default and controlling interest, among other defined agreements.
Securing private equity capital may be somewhat easier for companies. Banks and other traditional lenders will often have strict loan requirements for businesses. Additionally, business loans will quickly fill up a bank’s lending portfolio due to loan size. Lenders that wish to remain diversified in their loans will not often take on risky loans or continue to lend money to businesses. When this occurs, businesses will turn to private equity lenders who are typically more risky when lending money, expecting large payouts when they receive principle and interest payments from borrowers.
Venture capital funds are often the most common form of private equity capital. The money usually goes to entrepreneurs looking to finance the start up of a new business venture. These loans are extremely risky and may include a short leash for borrowers. While repayment may be delayed when compared to more traditional bank loans, the group lending the funds may require a management stake in the company or significant collateral in case of default. Borrowers may also need to provide the lender with financial statements that indicate how well the company is doing.
Growth funds are a secondary type of private equity capital. More established businesses that do not have the ability to secure loans based on their current financial condition or are too small to issue stock. Growth capital helps a company expand and retool its business operations for moving forward in the current market. Terms for these agreements may be more favorable than venture capital as companies have a better financial footing on which to repay the funds.
In the private equity capital market, some companies may issue agreements for funds known as mezzanine capital. These equity agreements take a secondary position to a company’s current loans or equity agreements. The purpose of these funds is to fill in gaps or shortages left by other lending agreements. The terms for mezzanine capital is often less favorable than regular equity funds, as companies holding these loans will be in a less favorable position for receiving funds in case of default.