There is only one main difference between VC and PE. It seems that almost everyone is missing the distinction between the two. It really has nothing to do with debt and there is a valid reason why debt/leverage is preferable.
VC firms provide only working capital to a company. While they might have a roll in management of the company, they are usually only interested in providing capital and they trust that the current management is capable of using the capital to grow the business.
PE firms are interested mainly in obtaining a controlling interest in the company, and many times taking the company private. They are usually of the opinion that it is the management of the company that is lacking, and not the working capital or cash flow. If the product or service is viable, then working capital and cash flow are generally just symptoms of the root problem. The opinion is that their own team has a greater ability to realize the true value of the company, and they recognize that as a result of mismanagement, the company will sell at a discount.
The only reason that leverage is brought into this at all is that most PE firms require controlling interest in order to execute the plan successfully. They will not be able to make the necessary changes if they only hold a minority stake. They could raise more capital and fund the purchase with internal cash, but that is very capital intensive and the cost of such capital is much higher than loans. Investors in PE groups are looking for 20%+ annually, whereas banks are only looking for 4-10%. It is a no-brainer. They are looking for the cheapest capital that will allow a majority purchase of the company.
The ironic thing here is that Romney is using his VC deals to tout management experience, when the reality is that PE deals are a much better indicator of management skill. It is also easily argued that PE deals are more valuable to the stability of the market than VC. In general, the only reason a company is accepting venture capital is that they cannot secure working capital through cheaper avenues. IOW, they are generally much less likely to succeed than an equivalent level of debt in a PE deal.
VC firms provide only working capital to a company. While they might have a roll in management of the company, they are usually only interested in providing capital and they trust that the current management is capable of using the capital to grow the business.
PE firms are interested mainly in obtaining a controlling interest in the company, and many times taking the company private. They are usually of the opinion that it is the management of the company that is lacking, and not the working capital or cash flow. If the product or service is viable, then working capital and cash flow are generally just symptoms of the root problem. The opinion is that their own team has a greater ability to realize the true value of the company, and they recognize that as a result of mismanagement, the company will sell at a discount.
The only reason that leverage is brought into this at all is that most PE firms require controlling interest in order to execute the plan successfully. They will not be able to make the necessary changes if they only hold a minority stake. They could raise more capital and fund the purchase with internal cash, but that is very capital intensive and the cost of such capital is much higher than loans. Investors in PE groups are looking for 20%+ annually, whereas banks are only looking for 4-10%. It is a no-brainer. They are looking for the cheapest capital that will allow a majority purchase of the company.
The ironic thing here is that Romney is using his VC deals to tout management experience, when the reality is that PE deals are a much better indicator of management skill. It is also easily argued that PE deals are more valuable to the stability of the market than VC. In general, the only reason a company is accepting venture capital is that they cannot secure working capital through cheaper avenues. IOW, they are generally much less likely to succeed than an equivalent level of debt in a PE deal.
