Types of private capital investment: Private Equity, Venture Capital, infrastructure, private debt and impact

Did you know that more than 90% of companies are private? Investing in private capital provides a new perspective, enabling us to see the forest of opportunities and not just the trees.

Private capital covers a wide range of strategies that invest in various types of companies or projects. At Crescenta we explain the main ones: Private Equity (PE), Venture Capital (VC), infrastructure, private debt and impact.

It is a type of private capital investment that invests in private companies, such as family or industrial companies. It is used to acquire companies, invest in their growth and boost their financial performance. In other words, it consists in contributing financial resources to a company for a certain period of time and, in exchange for this contribution, receiving a share of which a significant growth is expected. PE can provide investors greater returns than investments in the stock exchange, but we must consider that this investment has a longer time horizon.

This strategy represents a significant funding channel for companies that seek to grow and expand, while it is an attractive option for investors, due to the high returns they can obtain.

This type of investment involves investing in small- and medium-sized enterprises that are in an early stage of development. They are usually companies with a strong technological or innovative component (startups), which enable them to grow at an accelerated pace. Venture Capital also offers a high potential for profitability. Like PE, this type of investment is aimed at the long term, over five years.

We can find different types according to the stage in which the company we want to invest is. Let's highlight three:

• Seed capital: it invests early in newly created business ideas or companies.
• Early capital: it invests in the company's establishment (registration, website, offices, etc.) and the beginning of its activity when, even if there are sales, the company's EBITDA is negative. The capital contributed is larger than in seed capital investments.
• Late capital: it invests in a more advanced stage and can receive larger funding rounds.

Investing in infrastructure involves investing in the pillars of society and the economy. It includes investment in critical aspects such as water supply services, electricity grids, airports and public transport systems. The development of infrastructure generates employment, competitiveness and improves productivity, increasing well-being and reducing social inequalities.

“Adding basic infrastructure to a portfolio can provide a constant and stable source of returns, while providing protection against inflation, mitigating risk downwards and reducing the portfolio's volatility”, says JP Morgan AM.

These are long-term investments, with stable and predictable cash flows, in a highly regulated sector with significant entry barriers, allowing to achieve good geographical and sectoral diversification. In addition, investing in infrastructure benefits from the development of three of the world's leading megatrends: sustainability or decarbonisation, demographics and digitalisation.

Private Debt is an investment strategy part of the private capital category. Private debt involves investing in the debt of small- and medium-sized enterprises seeking alternative, instead of traditional (banks or public markets), sources of financing.

One of its main characteristics is the security offered to investors. Certain guarantees are negotiated when formalising the loan, so the investor is protected in the event of default. In addition, if a company is liquidated, the debt is always paid first, before, for example, private equity.

Therefore, investing in private debt is more secure than other strategies, but it provides lower returns than other types, such as PE or VC.

Invest in companies, organisations and funds that aim to generate a social or environmental benefit, in addition to profitability. These companies may have different objectives, such as improving the quality of life of local communities, protecting the environment, promoting gender equality and increasing access to education and medical assistance.

Unlike other types of investments, the main goal is not generating financial returns. However, it is not considered philanthropy, as it is expected to achieve a certain return, although not everything revolves around it.

Impact investment differs from other forms of investment, such as traditional investment, in that the financial return is not the only goal. In addition, the companies and organisations are expected to be transparent in their operations and account for their social and environmental impact. This type of investment incorporates a third element into the famous risk-return ratio: sustainability.

This is why it is seen as a powerful way to address some of the major social and environmental challenges that the world is facing, while obtaining financial returns for investors.

Yet, as with all investments, it entails risks, so investors must invest considering their assets, financial knowledge, investment horizon and risk tolerance.

This content is merely indicative. This content is merely financial training offered to you by Crescenta, without the intention of giving any type of personalised investment recommendation.

It is neither any type of advertising of financial instruments nor a recommendation or purchase offer.

Author

Sofía Cisneros

Communication and content - Crescenta