Formation of venture and private equity funds

What is venture and private equity?

Private equity provides financial resources for unlisted companies. Private capital is provided to develop new products, introduce new technologies, expand working capital, make acquisitions, or improve a company’s balance sheet. The private equity fund is thus an alternative investment fund, the primary purpose of which is to finance the acquisition of companies and parts of companies. This means that a private equity fund primarily sets up and buys companies and then provides them with capital, i.e. finances their operations. A private equity fund can change the ownership structure of a target company, as it often asks for a share in exchange for providing capital.

Venture capital is capital provided exclusively to early-stage companies by the investor for the start-up, early development or expansion of the company. It is important to note that here the investor also expects a higher return due to the higher risk. Thus, a venture capital fund is also an alternative investment fund that aims to finance the development of companies, and can invest a significant part of its capital only in companies in the early stages of corporate development. A venture capital fund can also be seen as a special type of private equity fund, as private capital is used to start businesses and develop or expand in the start-up phase.

Who can be venture and private equity investors?

Private equity investors can be divided into two major groups: institutional investors and individuals, and privately managed firms.

Business angels

Individual venture and private equity investors are commonly referred to as business angels. They invest in start-ups from their own assets or the assets of a company they manage. Through investment, they often also acquire ownership and take an active part in the management of the company.

Institutional investors

Venture capital and private equity funds are set up by fund managers. Fund managers involve different investors in the equity fund (for example: banks, insurance companies or other equity funds). It is then up to the fund manager to invest the capital raised (this is, of course, based on rules, in consultation with investors).

Institutional investors rarely get involved in the day-to-day management of a company where they have invested. In addition to capital, they can help start-ups with long-term strategic advice and networking.