Difference Between Private Equity and Portfolio Company

Private Equity and Portfolio Company are terms related to the market, but they have different meanings and functions.

Private equity refers to a form of investment (alternative) made in enterprises not indexed in public markets. While a Portfolio Company is a company or an enterprise in which Private Equity firms invest.

That is to say; Portfolio Companies are backed by firms making private equity investments.

The companies create a portfolio showcasing their products, services and achievements to attract investors, including private equity firms. These companies backed by private equity firms become part of the firm’s portfolio.

Thus, there is a reciprocal relationship between Portfolio Companies and Private Equity Firms.

Key Takeaways

1. Private equity refers to investments made in privately held companies by private equity firms or investors. In contrast, a portfolio company is a company that a private equity firm or investor owns.
2. Private equity investments are often made to grow and sell the company for a profit, while private equity firms or investors manage portfolio companies to generate long-term returns.
3. Private equity and portfolio companies involve investing in private companies, while private equity involves buying and selling companies, while portfolio companies are held for the long term.

Private Equity vs Portfolio Company

The difference between Private Equity and a Portfolio Company is that the former is an alternative form of investment. At the same time, the latter constitutes a part of the audience that the former targets. In short, the latter is financed by the former.

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Comparison Table

Parameter of Comparison	Private Equity	Portfolio Company
Composition	The private equity industry mainly comprises stable market players with deep pockets.	Portfolio Companies vary in terms of size, sectors, and investment. Budding as well as mature entrepreneurs can own them.
Function	They are investment funds that own equity or buy out in other companies and acquire a firm control over them.	They vary in terms of their products and services.
Ownership	These investment funds are generally organized into limited partnerships with plans to buy out private companies or to buy shares in public companies and eventually delist them from public markets.	A Portfolio company may be organized into a general partnership or a combination of a broad and limited partnership.
Source of investment	Large Institutional Investors such as mutual funds, pension funds, insurance companies, etc., and Private Equity firms backed by accredited investors are the primary source of investment in a Private Equity Fund.	Various investors like Venture Capital firms, Private Equity firms, Buyout firms, or holding companies may back Portfolio Companies.
The minimum level of Capital Investment	Since the goal of a private equity investment is to increase the value of a company and eventually sell it for a profit, such actions demand acquiring direct control over the operations of a company which in turn requires a large capital outlay.	The levels of capital investment vary according to the size, the product, the service, or the lifecycle of a Portfolio Company.

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What is Private Equity?

This alternative form of investment (includes venture capital, hedge funds, managed futures, etc.) comprises equity securities or debt in a company or an enterprise, mostly the mature ones not listed in public markets, in exchange for equity. 

The goal of such investment is to increase the value of a particular company by providing it with the required working capital, further developing its products and restructuring its operations or management so that the company could be eventually sold at a profit.

Private Equity Investments are mostly made by large Institutional Investors, i.e., those organizations or enterprises that make investments on behalf of other people like mutual funds, pensions or insurance companies, and Large Private Equity Firms funded by a set of accredited investors.

Some of the most favoured types of Private Equity Investments are as follows:

1. Distressed Investments: These are also known as Vulture financing—this type of investment funds companies with underperforming assets or close to bankruptcy. The investment aims to boost those companies by making necessary changes in their operations or management or earning profit by selling their support, including machinery, real estate, or patents.
2. Leveraged Buyouts: This refers to acquiring a company to upgrade its business and monetary health and sell it for profit to other investors. It is one of the most favoured private equity funding.
3. Real Estate Private Equity: This type of funding surged after the Economic Recession of 2008 that crashed real estate prices. Such investments are mainly made in REITs(real estate investment trusts) and commercial real estate. It demands higher minimum capital for funding, and assets are often locked away for several years.
4. Fund of Funds: As the name suggests, such investments are made in other funds, mainly hedge and mutual funds. They pave the way for investors who cannot afford minimum capital for investment.
5. Venture Capital: It refers to the funding provided to budding companies. Venture Capital can take different forms based on the stage in which such investments are made. For example,

Seed Investments are made to transform an idea into a full-fledged enterprise. Similarly, Early Stage Financing enables a business person to develop a company further. On the other hand, series ‘A’ Financing helps the entrepreneur survive and compete in a market.

 

What is Portfolio Company?

It refers to a company or an enterprise in which investors like Private Equity firms, Venture Capital firms, or Buyout firms own equity or term acquisition. It constitutes a single investment for the overall portfolio of an investment firm.

A company may create a portfolio exhibiting its products or services, business, and financial health to attract big investors who would provide the required working capital and management guidance to develop further and expand the enterprise.

While investing in Portfolio companies, investment firms take into account several factors:

1. The lifecycle of a company: It refers to the phase of growth a company is in. Some investors prefer to invest in stable companies exhibiting low risks and requiring a small amount of financial impetus to extend their horizons further, while others like taking risks and investing in budding companies with the intention of scalin0g an idea from a prototype to a product or service.
2. Size of the company: It includes asset value, revenue, earnings before interest, amortization, depreciation, and taxes.
3. Location: Whether the enterprise is regional or multi-regional, or international is also taken into account by investors
4. Industry: Some investors, like private equity firms, prefer to provide finance only mature businesses from traditional industries.
5. Investment Size: The number of funds to be provided by the investors depends on the size of the Investment. For example, Real estate demands a higher minimum of capital investment.
6. Diversification: Investors always try to finance companies of different sizes, sectors, and industries, so if a particular Portfolio Company fails, the loss incurred is not much devastating.
7. Portfolio Companies with their booming ideas not only upgrade the markets but also generate jobs and, thus, helps in boosting the national economy.

References

1. https://link.springer.com/content/pdf/10.1007/s11187-006-9022-1.pdf
2. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2290983