Private Equity and Portfolio Company are terms related to the market but they have different meanings and functions.
Private equity refers to a form of investment (alternative) made in enterprises that are not indexed in public markets. While Portfolio Company is a company or an enterprise in which Private Equity firms invest. That is to say, Portfolio Companies are backed by firms making private equity investments.
The companies create a portfolio showcasing their products, services and their achievements to attract investors that includes private equity firms. These companies backed by private equity firms then become a part of the firm’s portfolio.
Thus, there is a reciprocal relationship between the Portfolio Companies and Private Equity Firms.
Private Equity vs Portfolio Company
The main difference between Private Equity and Portfolio Company is that the former is an alternative form of investment, while the latter constitutes a part of the audience that the former targets. In short, the latter is financed by the former.
Comparison Table Between Private Equity and Portfolio Company (in Tabular Form)
| Parameter of Comparison | Private Equity | Portfolio Company |
|---|---|---|
| Composition | The private equity industry is mainly composed of stable market players with pockets running deep. | Portfolio Companies vary in terms of size, sectors, and investment. They can be owned by budding as well as mature entrepreneurs. |
| Function | They are investment funds that own equity or buyout in other companies and acquire a firm control over those companies. | They vary in terms of their products and services. |
| Ownership | These investment funds are generally organized into limited partnerships with plans to buyout private companies or to buy shares in public companies and eventually delisting them from public markets. | A Portfolio company may be organized into a general partnership or a combination of a general and limited partnership. |
| Source of investment | Large Institutional Investors such as mutual funds, pension funds, insurance companies, etc. and Private Equity firms backed by accredited investors are the main source of investment in a Private Equity Fund. | Portfolio Companies may be backed by a variety of investors like Venture Capital firms, Private Equity firms, Buyout firms, or holding companies. |
| The minimum level of Capital Investment | Since the goal of a private equity investment is to increase the value of a company and eventually selling it for a profit; such actions demand acquiring direct control over the operations of a company which in turn requires a large capital outlay. | The levels of capital investment vary according to the size, the product, the service, or the lifecycle of a Portfolio Company. |
What is Private Equity?
This is an alternative form of investment (includes venture capital, hedge funds, managed futures, etc.) made up of equity securities or debt in a company or an enterprise, mostly the mature ones that are not listed in public markets, in exchange for equity.
The goal of such investment is to increase the value of a particular company by providing it with the required working capital, further developing its products and restructuring its operations or management so that the company could be eventually sold at a profit.
Private Equity Investments are mostly made by large Institutional Investors i.e., those organizations or enterprises that make investments on behalf of other people like mutual funds, pensions or insurance companies, and Large Private Equity Firms funded by a set of accredited investors.
Some of the most favored types of Private Equity Investments are as follows:
- Distressed Investments: These are also known as Vulture financing. In this type of investment, funding is provided to companies with underperforming assets or which are close to bankruptcy. The goal of such investment is to boost those companies by making necessary changes in their operations or management or earn profit by selling their assets which may include machinery, real estate, or patents.
- Leveraged Buyouts: This refers to the acquisition of a company to upgrade it’s business and monetary health and eventually sell it for profit to other investors. It is one of the most favored private equity funding.
- Real Estate Private Equity: This type of funding surged after the Economic Recession of 2008 that crashed the real estate prices. Such investments are mainly made in REITs(real estate investment trusts) and commercial real estate. It demands higher minimum capital for funding and investments are often locked away for several years at a time.
- Fund of Funds: As the name suggests, such investments are made in other funds, mainly hedge funds, and mutual funds. They pave the way for investors who cannot afford minimum capital for investment.
- Venture Capital: It refers to the funding provided to budding companies. Venture Capital can take different forms based on the stage in which such investments are made. For example,
Seed Investments are made to transform an idea into a full-fledged enterprise. Similarly, while Early Stage Financing enables a business person to further develop a company. Series ‘A’ Financing, on the other hand, helps the entrepreneur to not only survive but also compete in a market.
What is Portfolio Company?
It refers to a company or an enterprise in which investors like Private Equity firms, Venture Capital firms, or Buyout firms own equity or term acquisition. It constitutes a single investment for the overall portfolio of an investment firm.
A company may create a portfolio exhibiting its products or services, business, and financial health to attract big investors who would provide the required working capital and management guidance to further develop and expand the enterprise.
While investing in Portfolio companies, investment firms take into account several factors:
- The lifecycle of a company: It refers to the phase of growth a company is in. Some investors prefer to invest in stable companies exhibiting low risks and requiring a small amount of financial impetus to further extend their horizons while others like taking risks and invest in budding companies with the intension of scalin0g an idea from a prototype to a product or service.
- Size of the company: It includes asset value, revenue, earnings before interest, amortization, depreciation, and taxes.
- Location: Whether the enterprise is regional or multi-regional or international is also taken into account by investors
- Industry: Some investors like private equity firms prefer to provide finance only mature businesses from traditional industries.
- Investment Size: The number of funds to be provided by the investors depends on the size of the Investment. For example, Real Estates demand a higher minimum of capital investment.
- Diversification: Investors always try to finance companies belonging to different sizes, sectors, and industries; so that if a particular Portfolio Company fails, the loss incurred is not much devastating.
- Portfolio Companies with their booming ideas not only upgrade the markets but also generate jobs and thus, helps in boosting the national economy.
Conclusion
Both Private Equity and Portfolio Company are market-related terms. But they differ in terms of their meaning and functions. In a way, they have a symbiotic relationship.
Private Equity funds constitute a source of investment in Portfolio Companies. The latter in turn make up for a segment of the investments made by the former and thus, is a part of the former’s portfolio.
References
- https://link.springer.com/content/pdf/10.1007/s11187-006-9022-1.pdf
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2290983