What even is private equity?

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Good morning, afternoon, evening, wherever you are folks! This week we’re uncovering the sub-asset classes that exist within the private equity spectrum, of which there are quite a few! Unlike public equities, which are relatively straightforward (open an app, review the data, purchase the shares, or, even simpler, and smarter, just buy an ETF), private equity offers an array of opportunities that come with wide ranging degrees of potential upside, and, of course, risk. Let’s get into it.

Early-stage venture capital

First up, which will be familiar to most, is early-stage venture capital (VC). This is capital injected into companies during their infancy, typically from pre-seed to Series A (sometimes up to Series B), with investments ranging from €250,000 to €5 million for pre-seed/seed and up to €15 million for Series A. This capital is generally used to help companies develop and refine their product, test out go-to-market strategies, and build out their initial teams.

These funding rounds are usually led by an institutional VC who specialises in either seed or Series A investments, with participation from angel investors and friends & family. The exception here might be pre-seed where there is often no institutional VC involved, only participation from angels and friends & family.

VC is the highest risk asset class within private equity and also has the longest investment horizon, with investments taking anywhere between 5 and 10 years to return capital. But it’s also the highest returning, by a country mile. Back in 2012, a famous Silicon Valley VC named Benchmark invested $13.5 million in Snap. Following Snap’s IPO in 2017 at a market cap of $25 billion, Benchmark made a cool 237x on their investment. Not bad…

Growth equity

Next up is growth equity, which might also be familiar to many of you. This is capital injected into relatively mature startups that have found product-market fit (if you don’t know what product-market fit is, read this article) and need to quickly scale into new markets, acquire smaller competitors, ramp up employees etc.).

At this stage companies typically have meaningful revenue and are often EBITDA-positive or close to break-even. Funding rounds are typically led by late-stage VC firms, growth focused PE funds or even corporate venture arms. Invested capital ranges from €10 million to €100 million and is generally used to help companies continue to grow rapidly towards a profitable exit, in most cases via an IPO or M&A.

Investment horizons at this stage are shorter than early-stage VC at around 3 - 7 years and expected return multiples range from 3-5x. The risk is also lower than early-stage VC, but there is still significant operational risk, market competition risk and the possibility of slower than expected growth.

Secondaries

With the IPO markets currently running at a snail's pace, secondaries are surging in popularity thanks to their ability to provide liquidity back to investors sooner than having to wait for an IPO. Secondaries are the act of acquiring shares in pre-IPO private companies (think Stripe, Canva, Databricks etc.) or even acquiring stakes directly in private equity or venture capital funds.

Mezzanine financing

Mezzanine financing sits somewhere in between debt and equity. It’s a type of investment where a lender provides capital but has the option to convert that loan into ownership if the company can’t pay it back. Imagine you need more money than the bank is willing to lend, but you don’t want to give up a large amount of your equity to investors. In this case, you might borrow money under mezzanine terms where you pay a higher interest rate than a normal loan, but the lender could get an ownership slice if you can’t keep up with payments. It’s riskier than a typical loan but safer than pure equity investing, making it attractive to both the company and its investors.

GP stakes

GP Stakes are also relatively new but quickly gaining in popularity. GP stakes are quite interesting because instead of investing directly into a fund, you instead take a cut of the GPs (general partners) earnings. In simple terms, you become a partial owner of the VC/PE business and get a share of its management fees and profits from all the deals it does.

Distressed assets

Distressed asset investing is about buying companies, or other assets, that are in serious financial trouble or even facing bankruptcy, often at a bargain price. The investor’s goal is to fix the problems, turn things around, and then sell or hold these assets once they recover in value, with the hope of yielding a substantial return. It’s quite high-risk because there’s no guarantee of a successful turnaround thanks to potential insolvency, legal complexities, and restructuring challenges.

So there you have it! A whistle-stop tour of some of the main asset classes that live under the private equity umbrella. As always, we hope you learned something this week. Don’t hesitate to reply directly to this email with any questions. We’d love to hear from you.

What we’ve been working on at Shuttle

• Working hard on upping our social posting 📢

• Lots of little bug fixes and improvements to the product 🐛

• Actively speaking with VCs in search of our next opportunities 🤝

• Looking for opportunities to improve our payment flows 💶

The Unsophisticated Investor is brought to you by Scott & Rob, the founders of Shuttle. We’re both sick of private markets being a playground exclusive to the ultra-wealthy so we started a company to challenge the status-quo. Shuttle’s singular focus is to unlock private markets for busy tech professionals and help them build wealth through the highest performing private market opportunities.

Scott & Rob
Shuttle Co-Founders