What are PE funds? Simply put, they are investment pools managed by professional investors (General partners or GPs), which raise capital from wealthy individuals, large institutions (like pension funds), and non-professional investors (Limited Partners or LPs).

Investors in PE funds inject their money to either:

  • Get full ownership or significant stakes in private companies not for sale in the stock market  
  • Buy companies that seek capital for growth or are under restructuring

The GPs are active investors. They run the fund daily, pick which businesses to buy, and charge up to 1-3% of the money each year for the privilege. If the company they bought is doing well, GPs keep 20% of the profit after returning to the original owners.  

The LPs are passive investors. They put in most of the money and don’t have the right to run companies, but when the PE fund sells its holdings, they’re entitled to a share of the profits according to their investment amount.

Both LPs and GPs aim to find companies with solid growth potential and sell or publicize them via IPO to earn high returns.

Types of private equity funds

Private equity funds come in many shapes, sizes, and strategies. Each individually addresses investor needs and objectives and has a risk-reward profile. 

For example, VC funds are sometimes riskier: they invest in early-stage companies with high growth potential but still have a high chance of failure. Buyout funds focus on established companies with a proven track record that deliver more modest yet reliable returns. Hybrid funds land in the middle: they may invest in a much more comprehensive range of companies than buyout funds and carry less risk than venture capital.

To understand each unique characteristic — here’s a breakdown of other types of private equity.

Direct company investment funds

These funds invest directly in companies, supporting different stages of their development to enhance growth and operational efficiency.

Leveraged buyout (LBO) funds

In an LBO, investors combine debt and equity to buy a company. They then reorganize its operations before selling it off at a later profit. 

This form of investment relies on the firm’s consistent cash flow to meet its obligations to repay borrowed money.

  • Investment timeline: 3-7 years.
  • Exit strategies: IPO, secondary buyout, sale to a strategic buyer.
  • Example: KKR — acquired Dollar Shave Club and sold it to Unilever for $1 billion.

Venture capital funds

VC investors pool money in early-stage companies with high potential, mostly in tech sectors, biotech, and clean energy. 

Even though not all startups are thriving, VC funds are interested in disrupting the market. So, they take a risk—invest and wait for huge profits through exits or IPOs. Additionally, VCs offer mentorship and guidance to companies they invest in.

  • Investment timeline: 4-10 years.
  • Exit strategies: Public offering (IPO) or acquisition by a larger company.
  • Example: Sequoia Capital — an early investor in companies like Apple, Google, and PayPal

Growth equity funds

Growth equity (or expansion capital) injects investments into mature, established companies that still need significant funding to grow. These companies usually have good cash flow and established business models but lack the financial boost for scalability or expansion regionally or globally. 

Note! Growth equity is typically targeted for company expansions, but it usually either doesn’t have or has minor control over ownership stakes.

  • Investment timeline: 3-7 years.
  • Exit Strategies: IPO, acquisition, secondary buyout (sale to another private equity firm).
  • Example: TCV — invested in companies like Airbnb, Netflix, and Spotify before they went public; TPG Growth — invested in companies like SurveyMonkey and Bumble before their IPOs.

Specialty investment funds

Specialty funds focus on specific sectors or distressed companies, employing expertise to manage more complex or niche types of private equity investments.

Real Estate Private Equity Funds (REPEF) 

REPE funds directly invest in various real estate assets, such as residential, commercial, or industrial properties, or in real estate company stakes. REPE investors often seek to add value to the properties they acquire through renovations, redevelopments, or other improvement strategies so they can sell them for a profit or generate rental income over the long term.

  • Investment timeline: depends on strategy (core: 5-10 years, value-add: 3-7 years, opportunistic: 7+ years).
  • Exit strategies: Selling the property, refinancing, and making secondary offers to other investors.
  • Example: Blackstone Real Estate Partners — invested in Hilton Worldwide and achieved a profitable exit through an IPO.

Infrastructure funds

Infrastructure funds pool money in infrastructure assets, such as transportation networks, utilities, power plants, etc. Sometimes, these investments are made in collaboration with governments. These assets are typically stable and make long-term cash flows, which attracts investors who seek lower-risk profiles.

  • Investment timeline: 10+ years (due to the long lifespan of infrastructure assets).
  • Exit strategies: The asset is sold to a long-term institutional investor, and the secondary offering is to other infrastructure funds.
  • Example: Global Infrastructure Partners — invested in Gatwick Airport in the UK and generated returns through long-term ownership and operational improvements.

Distressed private equity funds

The distressed funds invest when they purchase the debt from the bankrupt company at the lowest price.

Due to its high-risk nature, it is a high-rewarding type of funding.

The investor can profit in two cases:

1) The company’s financial health is becoming much more stable. The debt is becoming more valuable. Investors might spot it and sell it to recover the total value.

2) If the company’s bankruptcy isn’t over, investors armed with debt ownership can influence how it restructures its finances. Moreover, it can reorganize the company or increase its stake.

  • Investment timeline: 2-5 years.
  • Example: Oaktree Capital Management — invested in distressed debt during the 2008 financial crisis and generated significant returns.

Hybrid or mixed investment strategy funds

This group comprises funds that incorporate elements of both equity and debt or diversify across multiple private equity strategies.

Fund of Funds

A Fund of Funds (FoF) spreads money into different private equity funds: mutual funds, hedge funds, or a combination. This lowers the risk because the money moves between asset classes, geographic regions, and investment styles.

FoFs are particularly attractive for smaller investors or institutions seeking broad exposure without extensive due diligence on individual funds.

  • Investment timeline: 8-12 years.
  • Exit strategies: Investors typically redeem their shares in the FoF at the end of their investment term, with returns based on the performance of the underlying funds.
  • Example: Blackstone Alternative Beta Series — offers a variety of FoFs targeting different asset classes and risk profiles.

Mezzanine Capital Funds

Mezzanine capital is a mix of borrowing money and sharing ownership in companies. Usually, this type of fund is used to buy other companies, take control of their own company, or expand. Lenders might also get options to buy shares in the company later, which means they could make more money if the company profits.

  • Investment timeline: 3-5 years.
  • Exit strategies: Loan repayment, repurchase at a premium, or selling the loan to another lender.
  • Example: Ares Management Corporation provides a mezzanine investment for mid-market companies with growth initiatives and recapitalization. 

Secondary Funds

Secondary funds help people who’ve invested in private companies, or funds sell their shares early if they want to. The buyers usually get a discount, which means they make more money if things go well. This helps investors control when they put money in and take it out.

  • Investment timeline: This depends on the underlying assets and the fund’s strategy, but it is generally shorter than the original investment period.
  • Exit strategies: Secondary funds may hold the investments until the underlying funds mature and receive distributions, or they may sell the assets to other investors in the secondary market.
  • Example: Lexington Partners is a leading global secondary fund investor focusing on private equity, credit, and real estate assets.

Look for funds that match your growth stage and specific needs

With over 18k private equity funds globally, every startup and investor can find the perfect match VC fuels nascent ventures, growth equity propels established businesses, and buyouts empower mature companies. Tailor your approach: For initial funding, target VC firms. For scaling, explore growth equity. Considering a sale? Look at buyouts. 

If you are lost in guessing, get expert guidance to secure the perfect fit for your entrepreneurial journey.

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Hey there! I'm Anastasiia, a Content Writer at Waveup. With my marketing expertise and storytelling magic, I turn complex data and industry insights into your startup playbook, making the business world a breeze for you! At Waveup, I work with brilliant folks who make insights a never-ending flow. So, join, read, and enjoy!