What Is The Difference Between Private Equity And Venture Capital?

Venture Capital (VC) and Private Equity (P/E) have more in common, then having very significant difference. Having said that, it's not as if there is no difference between both. Of course, there is.

The objectives for both is the same - invest in a company that can generate decent returns over a period of time. At what stage to invest and how much time? These are questions that would depend on the fund that is investing the money. Broadly, the following are the differences between the two:

Per centage holdings

PE tends to invest a large proportion of the equity in a company. In most cases it could be as much as 100 per cent and rarely does it dip below 50 per cent.

VC do not have such large exposure. It could be less than 50 per cent, with several venture capitalist taking a stake in a particular company.

Nature of industry

Venture capitalists invest across most industries. This could be manufacturing as well those engaged in technology and services.

Private equity mostly tend to look at sunrise sectors, including those from biotech, information technology, e-retailing etc.

VCs may also invest through debt

P/E investors never invest in debt. In fact, the very name "equity" in the private equity name suggests that it has to be an equity holding.

VC use both the debt and the equity tool to invest. Also Read PE Investments Hit Record High Of $14 Bn In Jan-Sep

Returns

Both the investors look at returning money at around 20 per cent per annum. However, venture capitalists tend to spread their risk. They tend to invest small amounts in a large number of companies thus spreading their risk.

In India, private equity investment has seen investments of a staggering $93 billion, between 2001 and 2013. It's believed that in recent times, the returns of private equity investors has been just around 7 per cent, as several factors went wrong for the industry.

Venture capital investments have also surged in India. This year, venture capitalists have invested as much as $1.44 billion. As many as 323 deals have taken place in the country until Sept 2015.

A large amount of venture capital money was seen in the real estate and telecom sector in India, this year.

Conclusion

As seen there is not too much difference between venture capital and private equity. Venture Capital and private equity are investments that tend to look for returns over the longer term. Several global players have joined the investor list in India. Top players have invested in companies like Flipkart and Snap Deal.

Tiger Global is the largest player in space with major investments in companies like ShopClues, PolicyBazaar, Ola, CommonFloor, etc. Other major players in India include GST Global, KKR and Soft Bank.

Most of these firms tend to exit the business at the IPO stage after having attained their objective of returns from the business.

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