Choose one of the following options and write a 200 word response. Respond to tw
ID: 466284 • Letter: C
Question
Choose one of the following options and write a 200 word response. Respond to two of your classmates’ postings. Option A: What is the private equity market? How does it differ from other funding sources? Identify three different kinds of investors in the private equity market. Do the goals of these investors differ? How? Option B: Differentiate between venture capitalists and angels. Provide an example of a company that received seed investment from the private equity market. Why do you think that company approached the private equity market instead of other sources?
Explanation / Answer
Private equity is equity capital in operating companies that are not publicly traded on any stock exchange. It consists of investors and funds that make investments directly into firms that are not yet listed or conduct buyouts of public companies resulting n a delisting.
The main difference between private equity and other funding sources is that it is not traded in exchanges. Thus, private equity is less liquid than public equity. Valuation is also more difficult as it is not exposed to efficient capital markets due to an obvious assymmetry of information flows.
Three different investors in the private equity market are angel investors, venture capitalists and private equity firms. Their goals in making the investments do differ. Angel Investors are often retired entrepreneurs or executives and get involved right at the seeding stage of an idea. They are motivated beyond monetary returns - they like to mentor the next generation of budding entreprenuers. Venture Capitalists invest at a later stage of development and like market disruptors. They prefer greater risk in the quest of greater returns and invest in a larger number of ventures. Private Equity firms raise funds from sources like institutional investors and high net worth individuals. Their investments are in a less number of ventures, but significantly larger amounts. They are well known for leveraged buyouts in mature companies.