Private Equity Firms Vs Venture Capital

While both venture capital and private equity firms provide cash in exchange for equity positions in companies, the main distinction is the juncture in which the investment is made. With the exception of turnaround investments, private equity firms tend to invest in more established businesses with a history of positive, and preferably reliable, cash flow whereas venture capital firms tend to invest in earlier-staged companies with a less proven market presence.

The distinction between the terms venture capital and private equity described above applies to the vernacular used in the United States. That is, in the United States, the two terms are used as if they are distinctly different types of firms investing in different stages of corporate growth. In Europe, however, the terms venture capital and private equity may be used somewhat interchangeably in that British English uses the term venture capital to describe a specific subset of the PE market. Therefore, in Europe, when someone speaks about private equity, they may in fact be referring to what someone in the United States would call a venture capital firm.

Another point of potential semantic confusion is that "private equity" is also a commonly used term for people operating the real estate investing space. While the use of the phrase within the real estate sector has the same underlying financial meaning, the firms that provide private equity in the real estate sector are usually completely different firms than those that typically invest directly in corporate entities. There are some exceptions to this, as some investment firms invest in both companies and real estate, but they tend to be very much in the minority.

While we are discussing verbiage, we should also note that the firms that make direct investments into businesses are often called by several names, all of the same meaning, including: PE firm, financial sponsor, investment firm, buyout firm or investment company. Similarly, investment banks are often structured with a Leveraged Finance Group, which is often the same as the Financial Sponsor Group, which is often part of the Capital Markets Group. These can all be a bit confusing until someone just tells you that they are multiple ways of saying the same thing.