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Private Equity vs. Venture Capital

Posted on May 26, 2023April 12, 2024 by Oscar Jofre

For companies looking to raise capital, there are many options on the table. From raising capital from friends and family and crowdfunding to private equity and venture capital, not every option is suited for all entrepreneurs. In this context, the question “Private Equity vs. Venture Capital” is becoming popular.

So in this article we will explore the difference between venture capital and private equity, as well as some alternatives for companies looking to secure funding in the private capital markets.

What is Private Equity?

Private equity firms are investment firms that raise capital from accredited investors to make investments in private companies. In the case of private equity, these firms generally seek to take a majority stake in portfolio companies – which means that the firm will obtain greater than 50% ownership. Another characteristic of private equity firms is that they generally prefer to invest in established companies that have operational inefficiencies. The goal is to reduce these inefficiencies so that the company can turn profitable. If the firm sells a portfolio company or it goes public, it distributes returns to investors.

What is Venture Capital?

Similar to private equity, venture capital (VC) firms raise capital from accredited investors. However, they take a different role in the private capital markets. VC firms seek to invest in early-stage and startup companies with high growth potential. They often control less than 50% ownership and take a mentorship role. Once a portfolio company is acquired or goes public through an IPO, it can distribute returns to investors.

Alternative Capital Raising Opportunities

However, many companies find it difficult to secure VC or private equity funding. Since 2022, VC funding has dropped by more than 50% and late-stage investments have plummeted even more dramatically, down 63%. Still, there is hope for companies seeking to raise capital. During this time, the amount of capital being raised through JOBS Act exemptions had grown considerably, providing viable opportunities for entrepreneurs seeking capital. Through RegA+, companies can raise up to $75 million, and through RegCF, companies can raise up to $5 million. This capital can be raised from both accredited and nonaccredited investors, creating a wide pool of potential investors. At the same time, the minimum investment is typically much smaller, which allows everyday people to get involved with promising companies. It is also more cost-effective to raise capital through these alternatives than traditional VC or private equity firms, or going through an IPO.

Now that you know the key-points on Private Equity vs. Venture Capital, it’s easy to understand that learn about the differences can help you identify what capital-raising options may be best suited for your company. However, if you need additional guidance, reaching out to a broker-dealer or securities attorney can help point you in the right direction for your capital-raising journey.

Online Capital Formation is Always Available, Even When VC Funding Is Not

Posted on February 17, 2023March 13, 2023 by Oscar Jofre

The venture capital (VC) industry has been struggling since 2022. Venture funding has dropped by more than 50% since 2022 and late-stage investments have plummeted even more dramatically, down 63%. Online capital raising may be a viable alternative for entrepreneurs seeking funding in an uncertain VC climate.

What Is Online Capital Formation?

Online capital formation is the process of using digital platforms to raise funds from investors through JOBS Act regulations. Using exemptions from SEC registration such as RegA+ and RegCF, companies can tap into a larger pool of investors beyond traditional VCs and private equity firms. These investments can be accessed by anyone, regardless of their net worth or accreditation status. On the other hand, venture capital firms are typically limited to investing in businesses with high growth potential and start-up costs that require large sums of money. With online capital raising, entrepreneurs can access smaller sums of money from a larger pool of investors. In 2022, companies raised an impressive $494.0 million from RegCF raises and $431.8 from Reg A through over half a million investments.

Benefits of Online Capital Formation

Online capital formation offers many benefits for entrepreneurs and investors alike:

Access to a larger pool of investors: By using online capital raising platforms, businesses can access a much wider range of investors than traditional VCs or private equity firms. This allows businesses to access capital from individuals and retail investors who may not have the same wealth or investment track record as professional investors.

Increased transparency: Online capital raising platforms allow for greater transparency, giving investors more information about an offering before they commit to investing in a particular business. This allows investors to make more informed decisions and reduces the risks associated with investing.

Lower cost of capital: Online capital-raising platforms typically charge lower fees than traditional VCs and private equity firms, making it a more cost-effective way to raise funds. Companies are typically able to retain more of their businesses than the VC or private equity route.

Available 24/7/365

Online capital raising is available 24/7/365, which allows entrepreneurs to access funding when they need it without having to wait for the next round of venture capital or private equity investments. This makes online capital raising a particularly attractive option for businesses that need quick access to funds. This makes online capital raising such as Reg A+, Reg CF, and Reg D an attractive option for companies looking to access funds quickly and efficiently.

VCs have traditionally been the go-to source of funding for entrepreneurs, but venture capital investments are dwindling in today’s turbulent economic environment. Online capital raising offers a viable alternative that allows businesses to access a wider pool of investors, increased transparency, and continuous access to capital. With online capital-raising platforms, entrepreneurs can access funding quickly and efficiently without requiring lengthy fundraising cycles. In this challenging economic environment, online capital raising provides a much-needed lifeline for emerging businesses.

Looking Ahead at the Growth of Private Equity

Posted on January 30, 2023March 13, 2023 by Oscar Jofre

As a market now worth millions of dollars on a global scale, the history of private equity dates back to the early 1900s when J.P. Morgan purchased the Carnegie Steel Corporation. Since then, the industry has seen tremendous growth, especially as the global economic climate continues to develop. Over the next four years, analysts predict that the global private equity market will grow by $734.93 billion between 2022 to 2027, a CAGR of 9.32%.

Much of this growth is being driven by many factors. One of the most important factors is the increasing number of high-net-worth individuals on a global scale. High-net-worth individuals are defined as people with net investable assets amounting to more than $1 million. Because of this wealth, they are key players in private equity investments. Based on a report published by Boston Consulting Group, its projections show that capital commitments to private equity funds from these wealthy individuals will grow at a CAGR of 19% to reach $1.2 trillion by 2025 and account for over 10% of all capital raised by private equity funds.

The rise in private equity deals is another major driver of the market. Strategic alliances between companies are becoming more common, allowing them to access resources they otherwise would not be able to gain access to on their own. For example, Blackstone recently partnered with Thomson Reuters to carve out its financial and risk business into a USD 20 billion strategic venture.

Despite the various drivers of market growth, there are a few challenges that could impact the future development of the private equity market, such as transaction risks and liquidity. This concern primarily arises in transactions between companies from two different countries. Transaction risk can lead to losses when the currency rate changes before transactions are completed, as well as through delays or defaults in payments due to foreign exchange controls or political instability in certain countries. Additionally, low liquidity levels of private equity assets could hinder investments in private equity, as investors require more liquidity to invest in other assets.

Overall, the private equity market is expected to experience moderate growth over the next five years. This growth will be driven by factors such as an increasing number of HNWIs investing in private equity and a rise in strategic alliances between companies. However, some challenges could impede this future development including transaction risks associated with international transactions and low liquidity levels of assets. Despite these potential issues, global private equity investments will likely increase between 2023 and 2027 due to economic recovery and businesses seeking new investments.

Over the Next Five Years, the Private Capital Market is Expected to Double

Posted on October 12, 2022November 18, 2022 by Oscar Jofre

Over the past decade, fiscal stimulus and opportunities for liquidity have caused a surge within the private capital markets. Even though this year’s outlook is challenged by increasing borrowing costs and economies cooling, London-based research firm Preqin forecasts that the industry’s global assets under management will double to $18.3 trillion by the end of 2027, from $9.3 trillion currently. The study highlights how investors desire to seek alternative investment types in an economic environment characterized by uncertainties. While the first half of 2022 did see a fundraising drop in private capital by $337 billion from $495 billion in the same period last year. However, by 2023, private capital fundraising is expected to return to 2019 levels as the growing trend of private capital continues.

Private equity fundraising hit a record $561 billion in 2021, with North America leading the way, followed by Asia-Pacific and Europe, according to Preqin. According to McKinsey North America had about a 22% growth in private capital markets, compared to Europe with 17% and Asia with 13%. This means that for investors and companies raising capital, the US is a more attractive market than Europe and Asia and is a great place to market your private capital offering, notably through JOBS Act regulations like Reg A+ and Reg CF.

Private markets have been able to continue to grow during this pandemic because of the growth in digitalization and the internet. This has allowed for a decrease in face-to-face interactions, which has made it easier for managers to connect with LPs, as well as an increase in online tools and resources. For example, many fund managers have started using online data rooms, which allow investors to access documents and due diligence materials remotely. In addition, online investor portals have become more popular, providing LPs with 24/7 access to information on their portfolios.

The study found that the average private equity fund size has increased over the past decade, while the number of first-time funds has declined. The report attributes this to the “maturing” of the industry and the rise of large institutional investors, which have become an increasingly important source of private capital. Institutional investors, such as pension funds, insurance companies, and endowments, are allocating more of their portfolios to private capital as they seek higher returns. Private markets have outperformed traditional public markets in recent years, but that outperformance is expected to moderate over the next decade. Preqin’s study predicts that private equity returns will net 7.6 percent annually between 2018 and 2027, compared to 6.4 percent for public markets.

According to Preqin, the interest in impact investing has also increased in recent years. The firm estimates that there are now more than 3,000 impact funds globally, with assets under management totaling $228 billion. In particular, environmental, social, and governance (ESG) considerations are becoming increasingly important to private capital investors. A majority of private capital firms say that they consider ESG factors when making investment decisions, and almost half of firms say that they have adopted policies or strategies specifically focused on impact investing. As the private capital markets continue to grow, firms need to consider how they can best position themselves to capitalize on this growth.

The private capital markets are expected to continue growing in the coming years, presenting a unique opportunity for raising capital. In addition, the growth of the private capital markets may lead to more regulation, as policymakers seek to mitigate risk and protect investors. Overall, the study provides a positive outlook for the private capital markets. For firms looking to take advantage of this growth, it’s vital to consider how they can best position themselves to capitalize on these opportunities. For investors, this means considering which private capital investment opportunities offer the best potential returns. But regardless of how the private capital markets evolve, one thing is clear: they are likely to play an increasingly important role in the global economy.

Private Capital Trends for the Cannabis Industry

Posted on July 8, 2022 by Oscar Jofre

As the cannabis industry continues to grow, so does the need for new methods of raising capital. Revenues have doubled over the past three years, and the industry is on track to reach $25 billion annually by 2025, or $14.1 billion for CBD alone, but traditional methods such as bank loans and private equity are often unavailable to cannabis businesses, forcing them to turn to the private market for capital. While often more flexible and forgiving than the public market, the private market can be a challenging place to raise capital without the knowledge and experience.

The Constantly Growing Industry of Cannabis

The cannabis industry is changing, and new opportunities for entrepreneurs are coming. Thanks to the JOBS Act, businesses in the cannabis industry can now use regulations like A+ and CF to raise capital from the general public. This offers several advantages, particularly the ability to reach a larger pool of investors and thus raise larger sums of money.

However, the most significant advantage of Reg A+ is that it allows businesses to retain more control over their company. Traditional methods of raising capital typically require businesses to give up a larger share of their equity. This is especially beneficial for businesses in the cannabis industry, which is still in its early stages and is constantly changing. With Reg A+, companies can raise capital from the general public while avoiding the costly process of going public. With more control over their company, and the ability to avoid costly IPOs, firms in the cannabis industry can better position themselves for success.

Investing in the Private Cannabis Market

The private market for cannabis investments is growing rapidly as the legalization of cannabis spreads throughout the US. Entrepreneurs are looking to get in on the ground floor of this new industry, and there are several options available to them when it comes to investing in cannabis.

Private CBD companies, such as Stigma Cannabis and UNITY Wellness, are turning to online capital raising to fund their growth. These diverse companies focus on many aspects of the industry, from CBD supplements to CBD skincare products, and represent only two of many companies innovating in this space. Regulations A and CF provide excellent opportunities for these companies and the investors looking to support them.

Getting started as an investor in the rapidly evolving private cannabis industry can be scary, but it’s also an exciting opportunity with many challenges and rewards. You can make the most of this unique opportunity by educating yourself on the process and available resources, and looking for and researching a private cannabis company that resonates with you as an investor.

For cannabis companies looking to raise capital, the process begins by identifying the team that will help you reach your goals, such as experienced securities lawyers, broker-dealers, investor acquisition firms, transfer agents, and other parties critical to your success. However, you should also consider how you can turn customers into investors and brand ambassadors as they will be essential throughout your capital-raising journey.

Cannabis Industry Trends in 2022

Cannabis companies are benefiting from increasing consumer acceptance of the product in 2022. In states where cannabis is legal, tax revenue from sales has been significantly higher than predicted. This trend will likely continue as more states legalize cannabis, and the industry becomes more mainstream. It could also remove many barriers to entry for potential investors and entrepreneurs looking to enter the space.

Despite the current political environment, which is generally unfavorable to cannabis companies, several bills are making their way through Congress that could positively impact the industry. The SAFE Banking Act, for example, would allow FDIC-insured banks to offer their services to cannabis companies, providing much-needed financial infrastructure.

The industry will almost certainly continue to grow because of the acceptance of cannabis and its use in a variety of products. The cannabis plant produces several compounds with medical, industrial and commercial applications, with THC and CBD only the most well-known. Developing these products and bringing them to market is creating more jobs, stimulating the economy, and becoming more accepted by people from all walks of life.

Growth in the cannabis industry is not likely to slow down anytime soon. Investors and companies interested in the industry should keep a close eye on developments at the state and federal levels and the financial health of companies in the space. With the right mix of factors, the cannabis industry could achieve even greater heights in the years to come.

Is Equity Crowdfunding Immune to Market Volatility?

Posted on July 6, 2022July 7, 2022 by Oscar Jofre

In a recent TechCrunch article, author Rebecca Szkutak asserts, “With the fundraising climate now showing cloudy skies, equity crowdfunding is getting ready for a field day.” The stigma associated with crowdfunding is reversing; once viewed as a fundraising method for companies “not good enough” for venture capital, it has grown substantially in the past few years. Better yet, 2022 is “poised to be monumental for equity crowdfunding.” From the start of this year to the end of May, companies have raised $215 million through this method of capital raising, an increase of $200 million from the same period last year. Favorable evolutions to regulations in this space are only contributing to this growth.

It will be exciting to see how these trends continue to develop and enable companies to raise capital through to the end of the year. To read the full article on TechCrunch, click here.

What Kind of Data is Relevant for Private Equity?

Posted on June 29, 2022June 30, 2022 by Oscar Jofre

The world of private equity is shrouded in a certain amount of mystery. What data do private equity firms use when making their investment decisions? What kind of research is needed to identify opportunities in this market? With the private equity markets raising over $665 billion in 2021, up from $521 billion in 2020, the use of data for private firms is becoming more crucial than ever. This blog post will look at the data types most relevant for private equity investors and how this information can benefit them in certain situations.

The Role of Data in Private Equity

Private equity is a type of investment generally reserved for high-net-worth individuals, venture capitalists, and institutional investors. However, these opportunities are being afforded to more individual investors thanks to the JOBS Act. It is an investment strategy that involves buying stakes in companies that are not publicly traded on stock markets. Private equity firms, in particular, typically have a longer time horizon for their investments than other types of investors and often are willing to invest in companies with high growth potential.

For these investments, investors may rely heavily on multiple data sources to provide insight and justify investment decisions. These sources may include:

Financial data is relevant to PE firms because of the need to monitor a company’s financial health. This data can help PE firms identify potential risks and flag companies that may be in trouble. Financial data can also help firms assess a company’s growth potential, allowing them to make more informed investment decisions.
Operational data is relevant to PE firms because it helps them understand a company’s business model and evaluate its efficiency. This data can help firms identify opportunities for cost savings and process improvements.
Market data lets PE firms know what’s happening in specific industries and understand where there might be opportunities for companies they own to gain or lose market share. It also helps firms keep tabs on broader industry trends that could present opportunities or threats to their portfolio companies.
Alternative data allows firms to track a company’s performance in real-time and make more informed investment decisions.

Data is an essential part of the private equity investment process, which firms must consider when making investment decisions. Private equity firms often rely on proprietary data sources, such as data from the companies they own or have invested in, to make investment decisions. They also use external data sources, such as public market data, to corroborate what they see from their data sources.

The Importance of Data

With the increasing importance of various types of data, private equity firms must be able to access and analyze this data to stay ahead of the competition. Firms that can effectively use data will be well-positioned to make informed investment decisions, improve their portfolio companies’ performance, and generate better returns for their investors.

Beyond traditional data sources, alternative data is becoming increasingly important for private equity firms. This data can come from various sources and helps PE firms better understand the companies they invest in, make better investment decisions, and provide more hands-on operational support to their portfolio companies. Alternative data can help PE firms corroborate what they are being told and get a complete picture of the company they are interested in investing in. Alternative data can also help with operational decisions after an investment has been made. The ability to crunch a company’s proprietary data and glean insights into broader industry trends is crucial to helping a private equity company increase its market share, improve operational efficiency, and ultimately time the exit correctly. Therefore, a practical application of alternative data can create a virtuous cycle for private equity firms: better investment strategy, selection, execution, management, and realization, driving improved returns and increased LP demand.

Any one source of data may not provide the entire picture of a potential investment, making it critical for private equity investors to analyze a wealth of data before making an investment decision. Overall, data can help to illustrate patterns and opportunities within the private equity space.

There’s a Lot of Private Capital to Go Around

Posted on June 15, 2022June 27, 2022 by Oscar Jofre

With all the turbulence in the public markets, private markets look even more attractive to investors. The private markets are 4x the size of public markets. Investors are and will continue to look for investment opportunities and right now, there is a lot of private capital to go around when we see these numbers.

A Staggering Amount of Private Capital

The private capital available in the world today is staggering. A recent report by Bain & Company found that there is more than $5 trillion of uninvested funds currently available from private equity firms, and this number is only expected to grow in the coming years. With this influx of cash, private equity firms can engage in mega-deals and drive up valuations in the process.

The increased availability of private capital is not just limited to traditional private equity firms. Family offices, sovereign wealth funds, and pension funds play a more prominent role in the private equity space and have experienced sweeping changes in 2021. With all this capital available, it’s no wonder that the private market is growing. While some people may be concerned about a potential bubble, it’s important to remember that the private equity industry is still relatively small compared to other asset classes. So even though there may be some risk of over-inflated valuations, the private equity industry still has much room to grow

Accessing Private Capital

We are witnessing record-breaking investment levels reaching billions of dollars. Several reasons for this influx of cash include:

Low-interest rates
An improving global economy
A renewed focus on private equity and venture capital

The wealth of private capital available today is staggering and growing. The options for accessing this capital are many and diverse, so there’s no one-size-fits-all solution for each private company looking to raise capital. However, some general guidelines will help you find the right resources for your business. You must understand what stage your company is in. This will help you identify the right kind of capital, as well as the right source of that capital. There are generally four stages of funding for a business:

Pre-seed Stage: This is when you have an idea but no product or service to sell. You will need to raise funds to develop your concept and bring it to market.
Seed Stage: This is when you have a product or service but no sales. You will need funds to finance your product development, marketing, and initial sales efforts.
Early Stage: This is when you have initial sales but are not yet profitable. You will need funds to finance your growth and expand your business.
Late Stage: This is when you are profitable and looking to scale your business. You will need funds to finance your expansion plans.

There are many private capital sources, including family and friends, angel investors, venture capitalists, accredited investors, nonaccredited investors, and private equity firms. Each has its strengths and weaknesses, so it’s essential to understand the differences before approaching them for funding.

Additionally, we are even beginning to see a growing player in this market: JOBS Act exceptions. These exemptions, Regulation A+, Regulation CF, and Regulation D, are game-changer for companies and investors alike. These exemptions allow companies to raise significant capital from accredited and nonaccredited investors alike, which continues to widen the pool of potential investors.

The private capital market is booming, with record-breaking investment levels reaching billions of dollars. There are several reasons for this influx of cash, including an improving global economy, low-interest rates, and a renewed focus on private equity and venture capital. Not to mention, the JOBS Act has introduced new sources of capital outside of the traditional VC and private equity round. The everyday investor is showing significant interest in the ability to get in on the ground floor with a promising company to grow their wealth. With so much private capital available, it is time to take advantage of it.

Private Equity’s Primetime Has Arrived

Posted on June 13, 2022June 27, 2022 by Oscar Jofre

Private equity’s primetime has arrived! This stems from a number of reasons, including favorable economic conditions for the private capital market. In fact, 42% of private equity limited partners report a 16% net return in this space. Here are three factors in particular that have caused private equity to outperform public equity in 2022.

1) Interest Rates:

A survey found that 71% of global private equity investors have indicated that their equity investments have outperformed their public equity portfolios since the global financial crisis. This is in part because private equity firms are less reliant on debt financing than public companies. Higher borrowing costs will hit public companies harder, putting them at a competitive disadvantage over private companies with rising interest rates.

2) Economic Uncertainty:

Some degree of uncertainty characterizes current economic environment. This can be attributed to the ongoing trade conflicts between the United States and China, Brexit, and the coronavirus pandemic. These factors have made it difficult for public companies to make long-term plans and invest for the future. Private equity firms, on the other hand, are better suited to deal with economic uncertainty. This is because they can take a longer-term view and are not as reliant on short-term results.

3) Regulation:

The increased regulation of public companies has made it more difficult and expensive for them to operate. Private companies are not subject to the same level of regulation, giving them a competitive advantage. Additionally, private companies can benefit from registration exemptions, like RegA+ and RegCF, which allow them to raise capital from everyday investors without the need to go public. This provides private companies a significant tool they can use to their advantage and fuel their growth.

These combined factors show that private equity has arrived and is here to stay. This will likely continue in the future, making private equity an attractive investment for investors. More individuals are involved in the private markets with the rise in forms of private investment for regulated and non-regulated investors, such as the JOBS Act regulations. This means more capital is flowing into private markets, which drives up valuations. With the current market conditions, investors would be wise to allocate a portion of their portfolio to private equity to protect and grow their wealth and prepare their portfolios for the future.

Tag: private equity