The Differences Between Venture Capital and Private Equity

Friday, August 03, 2012

Transcript

Mitt Romney's background at Bain Capital has become a big campaign issue. Most times, Bain Capital and Romney are grouped under the private equity banner. Other times, they're grouped under the venture capital banner. Which is it? Brooke speaks with Emily Mendell from the National Venture Capital Association and Dan Gross from Newsweek Dailybeast.

Guests:

Daniel Gross and Emily Mendell

Hosted by:

Brooke Gladstone

Comments [6]

John Ballard

Equity capital and venture are both important to the market but in different ways. Most people understand VC and presume that all investments are the same. But as this excellent explanation shows, they are not to be confused.

Equity capital investors (including many deals call "leveraged buyouts" and "mergers and acquisitions") are to the marketplace what bail bondsmen are to the criminal justice system. They are an important part of the infrastructure but they are not the main reason for its existence.

Any jobs that result from the acquisition, shaping up and/or disposition of a company are important but since "labor" is one of the most expensive components of any business, the number of jobs following any such maneuver is almost certain to be mathematically smaller than prior to the event. The mission of equity investors is to either whip a company into growth or liquidate it and sell it off for body parts.

Aug. 08 2012 01:19 PM
Bob from San Francisco

Venture Capitalists work to create value (jobs, intellectual property and profits) from Ideas - using equity and little if any debt. Private Equity investors tend to focus on turning around under-performing or failing businesses - using mostly money borrowed from banks et. al. PE is typically highly leveraged where as VC is not.

Aug. 06 2012 12:35 PM

Difference between venture capital and private equity firm.

venture capital start and build new companies from scratch so, when companies closes everyone pays.

private equity firm come in and turn around existing companies so, when companies closes, only the private firm (the lending firm) makes money from charging fees and/ or selling the companies.

Aug. 05 2012 05:30 PM
Jack Jackson from Central New Jersey

hmmm...I don't get the two comments so far. I thought the definitional difference - venture capital funds start-ups, private equity is a turn-around specialist, i.e. takes an under-performing company and infuses (often borrowed) capital to 'go large'. If it works, everybody makes money; if it doesn't the private equity company gets paid and the workers go home. I thought it was clear. The companion term 'vulture capitalist' wasn't explained. A determination over whether Bain Capital was or was not a practitioner of vulture capitalism would be useful.

Aug. 05 2012 11:02 AM
Charles

So OTM spent 09:45 discussing the nomenclature of "venture capital" and "private equity," all the while presuming that private equity is bad and a job-destroying endeavor.

This wasn't just a one-sided diatribe; this was dumb. Instead of rounding up two of the usual suspects from the public radio/Salon/Slate/The Nation/Daily Beast gang, you might have challenged yourselves and your listeners by talking to someone like Andy Kessler, who recently contributed this op-ed to the Wall Street Journal:

http://online.wsj.com/article/SB10001424052702303740704577527200796292034.html

Besides the two business entities you described -- venture capital and private equity -- you forgot the kind of entity that gave us the bankrupt company Solyndra, with all of those job losses; that entity is "the government."

Aug. 05 2012 09:33 AM
12 Sandwiches

Dan Gross's characterization of private equity of private equity misses the mark and only fuels the fire. I'd point you to two great post by the Epicurean Dealmaker in which he correctly states:

"Financial sponsors tended to buy stable companies with strong, predictable cash flows using very little equity and lots of debt, and then use those cash flows to pay down debt and boost the value of their equity. (This was the model very much in effect when Mitt Romney ran Bain Capital decades ago.) Nowadays, however, that simple leverage play is almost nonexistent. There is plenty of competition for businesses, which pushes purchase prices up, and most lenders now refuse to finance buyouts with less than a 30% or even 40% equity contribution by the sponsor. Nowadays, private equity has to improve the value of their portfolio companies in order to make any returns."
Two very relevant posts of his (should be required reading):
http://epicureandealmaker.blogspot.com/2012/05/your-village-called.html
http://epicureandealmaker.blogspot.com/2012/01/rape-of-persephone.html

Aug. 04 2012 07:41 AM

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