Difference Between Private Equity and Portfolio Company (With Table)

Private Equity vs Portfolio Company

Private equity and portfolio companies are two diversified investment entities required for the growth of the company.

Private equity is the sum of all kinds of funds from investors used to acquire or invest in private companies. Private equity funds are usually used in acquisitions or expansions.

The portfolio company is an entity bought by all different investment portfolios, which are again backed up by private equity funds. These funds acquired are invested by the company in various portfolios. This fund is purely for diversification of funds.

Private equity is also considered as an alternative investment opportunity, where the investor directly buys ownership in the company. Most of the big banks and companies set up private equity firms, where high net worth individuals have the opportunity to buy a large part of the company.

The difference between private equity and portfolio company is, private equity funds are mobilized by a single company or an investor to invest in other big or small firms. Whereas, a portfolio company is a combination of a buyout firm, holding firm, or a venture capital firm backed by private equity funds to diversify in the portfolio of the company.


 

Comparison Table Between Private Equity and Portfolio Company (in Tabular Form)

Parameter of ComparisonPrivate equityPortfolio company
OwnershipPrivate equity investors own them. Ownership is within indoors and mostly not publicly traded.The portfolio company is privately owned. To some amount, there is an ownership of the venture capital firm.
Collaboration Mostly private equity funds come from high net worth individuals and small firms that purchase shares of a private company.Collaborated with venture capital firm investors. This investment again used to raise funds for both the portfolio company and the venture capital investment.
Role of investorThe role of investors is high in this private equity firm. The investors have control over the company's board of directors, or sometimes the investor's chair in top positions.Investors buy substantial ownership, and members take high positions. These investors often appoint associates in managerial positions.
Profit-sharingPrivate equity firms make money by exiting their investments and try to sell the company to a much higher price than cost price.

These profits shared among investors according to their deal and level of investment in the firm.
Profits from portfolio investment are earned mainly by the interest on the lending money. A portfolio owner who owns a small or large part receives a lot via cash dividends and shares invested.

Most of the time, money earned is further invested, and a large chunk of profit made by selling a portfolio for a much higher price.
Role of IPOPrivate equity firms choose to go public to transform the organization for privately held to public transform.

The main reason is to avail a high dividend of private equity stocks once gone public.
IPO enables a portfolio company to allow a wide pool of investors to invest in the company.

This investment is further used as capital in the future and also to repay any debts accumulated in the process of running the company.

 

What is Private Equity?

Private equity is a generic term used to define all funds that pool money from a bunch of investors to pool money, sometimes a lot of money, which are, in turn, used to acquire stakes in companies.

The investment capital of “PE” (private equity) comes from HNI’s (high net worth individuals), and most of the private equity industry consists of large institutes like pension funds and significant equity funds.

The funds pooled by private equity are, in turn, used for revenue generation, reinforcing company policies, and also to bring cutting edge technologies for the growth of the company. The funds often used in the manufacturing and service sector.

There are many types of private equity funds; some of them are as follows: –

  1. Venture capital (VC) – These funds are an amalgamation of money that typically invests in small, early, and start-up businesses that have high growth potential but less access to funds. An investor bears in the enormous risk in investing anticipating high returns just by believing in the novelty of the company.
  2. Buyout or Leveraged buyout (LBO) – These funds are opposite to venture capital. LBO funds invest in big businesses that are more stable. These funds use extensive amounts of leverage to increase the rate of return.
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Private Equity 1
 

What is Portfolio Company?

This is a single investment for a firm overall portfolio—generally, a term used by venture capitalists and other private firms to describe their stake and own equity.

Here, the venture capital firm invests in the company by buying substantial ownership. The members who invested, take high positions on board of directors and take critical roles in the decision-making process.

As a portfolio company, most of the business invested get expert pieces of advice and essential business contacts usually through the investors. These connections, in turn, help the company to grow and expand.

The goal of investors in portfolio companies is to either sell your company to a larger enterprise or take it public by issuing IPO. This money is, in turn, pays back the investors with lots of profits.

Once the above process becomes a success, the investors, founders, and employees who received significant shares in a company will receive a massive amount of money.

Portfolio Management

Main Differences Between Private Equity and Portfolio Company

  • Both these terms are closely related and often paired with venture capital funds. The main difference is that private equity firms buy mature and established companies. In contrast, portfolio companies are privately owned by venture capital firms to invest in all types of small businesses that require seed money.
  • Private equity firms usually invest in companies’ overall industries, whereas portfolio companies invest in high-end technology firms, who have a promising future.
  • Private equity firms buy a significant share in the company by owning a high stake. Whereas, the portfolio company has less share compared to the latter.
  • The investment size of private equity firms is substantial, usually, investors spend a huge amount in the company. Here, in portfolio companies’ small investments are made by small groups to ensure the start of the company.
  • As the investment size of private equity firms is high, the investors exit after a prolonged period ensuring maximum profits or at least minimum loss. But, in portfolio companies’ investor’s exit within five years, as and when the business starts to ripe little benefits. The risk is high here because of uncertainty.


 

Conclusion

Larger companies have higher valuations than smaller ones usually. A private equity firm acquires a company typically to work together and increase earning’s. All companies backed up by private equity firms can increase the company’s earnings by diversifying, investing, and expanding.

The portfolio is a collection of products, services, achievements of the company. These diversified portfolios of the company generate profits in return for investors.


 

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