Comments on: Is venture capital a form of private equity and vice versa?

By: The Private Equiteer

The Private Equiteer — Mon, 16 Nov 2009 00:15:47 +0000

Alex: I was just talking about this the other day with a VC. They said while they mostly use pref stock, they don’t use a coupon or any other tool to create interim cash flows. Main reason is obviously that they don’t have the free cash and they’ve got uses for any spare cash, namely growth. So, yes, that certainly is one of the major differentiations.

By: Alex

Alex — Sat, 14 Nov 2009 09:47:31 +0000

I think you see a big difference if you make point 4 a bit more precise. A VC will invest directly as ungeared equity, whereas PE will actually invest predominantly in quasi-equity (ie Loan Notes, Preference Shares) with a relatively high coupon, leaving the ordinary equity as a tiny sliver at the top of the capital structure (on Day 1- if all goes well it will grow).

By: The Private Equiteer

The Private Equiteer — Wed, 28 Oct 2009 08:14:23 +0000

Greg: where I’m from, PE and VC are quite distinct; hence, the way I refer to them, which has admittedly caused some confusion.

Good point about needing revenue for funding these days, but private equiteers (unlike VCs), tend to scoff at using “revenue” and “value” in the same sentence. We even scoff at profit and value in the same sentence; we want maintainable free cash flow.

Analyst: that’s why I added the word maintainable. I suspect even in distressed situations, investors hope maintainable cash flow is positive even if current cash flow is negative. What’s the difference you may ask? Well, I suppose that maintainable cash flow relates to what’s expected of the ongoing operations. Anyway, that was my take at the time of writing, but it’s a good point you make.

By: Analyst

Analyst — Wed, 28 Oct 2009 06:54:18 +0000

To add to the discussion, point 5 might be expanded to read “The investment is in an established business with existing customers and a core of positive maintainable cash flows”

Reason being the highly popular distressed private equity industry…

By: Greg

Greg — Wed, 28 Oct 2009 05:45:55 +0000

I think that while in the bubble days of ’99-’00, point 5 didn’t necessarily apply to venture capital backed firms, these days, it seems like for anybody who’s looking to raise a Series A, one has to come to the table with positive revenue stream instead of just a fancy idea now..

I do agree with your final point though and believe that it is a pretty major distinction. That said, don’t people still generally consider VC a subset of PE?