Private Equity: Episode 5 - The Stages of Private Equity Financing

In Episode 2, I introduced the two main branches of Private Equity (Capital Investment): Venture Capital and Buy-Out. Let's now dive deeper into the various financing stages they cover.

Venture Capital finances younger companies to help guide the development of their projects. The first stage, Seed Capital, helps the founding team finalize their prototype, build the business model, and attract the first clients. At this point, it’s mostly Business Angels who step in, though more and more funds are showing interest in these very early-stage projects.

As the project progresses, having launched its commercial strategy, gained clients, and generated some recurring revenue, the company becomes eligible for Growth Capital. This stage is aimed at supporting the company’s rapid growth with larger resources. The goal is to turn the startup into a mature, profitable, and well-organized company, ensuring the sustainability of its operations. At this point, funds capable of investing tens of millions of euros get involved.

On the other hand, Buy-Out focuses on mature companies. Funds intervene to assist with development, including financing external growth operations, international expansion, or supporting the transfer of ownership when owners wish to sell (often referred to as Capital Transmission).

These operations often rely on bank loans to take advantage of leverage, known as LBO (Leverage Buy Out). Various types exist, depending on how the deal is structured:

• Management Buy-Out (MBO): The company is bought by its current managers and employees, with backing from investors.
• Management Buy-In (MBI): The company is bought by external managers with the support of investors.

And there are many other variations, depending on the specific deal structures chosen.

At the very end of the process, when a company is declining or in crisis, Turnaround Capital steps in to help find solutions to overcome these difficulties (restructuring, new business strategies, etc.).

Private equity funds, therefore, have the ability to intervene at every stage of a company’s lifecycle.