Private equity investing can have many possible applications in a national economy, however, in research literature, such tends to be delineated according to two specific forms: venture capital and its non-venture counterpart. This is a somewhat arbitrary distinction, as the two share much in common. Both involve long-term equity participation in an enterprise with relatively ambitious market goals, such as expanding productive capacity. There is in all private equity illustrations some requisite investor involvement in investee firm decisions, exercised often through direct representation on boards of directors.
As shareholders, all private equity investors and their agents are also keenly interested in the strategic realization of an enterprise's long-term objectives. To varying degrees, venture and non-venture investment specialists are patient and pro-active in achieving this result. Over the lifetime of an investment, a firm may receive benefit of skills, experience, and a network of business contacts that prove invaluable to developing and advancing products in domestic and global markets.
In other words, the contribution of the private equity supplier is not just money. It is additionally the potential value-added of hands-on growth management that, in the end, leaves the investee firm with enhanced capability, competitiveness and productivity. This is particularly vital to young, knowledge-based and technology- intensive business where, in the case of venture financing, the personnel of the supplier institution possess related industrial expertise.
Venture and non-venture forms also both utilize debt-like instruments in investments to accommodate convertible or subordinated securities, et al. Generally speaking, private equity investing aims to generate income through appreciation of illiquid holdings and capital gains once holdings are disposed.
The markets for venture and non-venture private equity can also be said to overlap, however, the two differ with respect to their primary investment targets. The focus of the former is on new, growth-oriented SMEs at various stages of development, such as seed projects, start-ups and early or late phases of expansion, to which the venture capital institution will offer support until liquidition of the equity stake by an initial public offering or acquisition. Venture financing may also back acquisitions, buyouts and turnarounds of slightly more established SMEs.
Such investment activity always carries high risk, sometimes because an SME's product idea is in its infancy or because firm assets are intangible and, consequently, are not seen as being suitable for conventional forms of secured financing (e.g., bank loans). These characteristics are clearly evident in the high technology venture. It could also be that the pace of enterprise growth is exceptionally fast. Generally speaking, the duration of venture investment projects is usually between three and ten years.
Non-venture equity is also disposed to high risk, but tends to concentrate on more sizeable investment deals and larger companies. A typical client is the private and well-established medium-sized firm situated in traditional goods and services industries. Another is the publicly listed large corporation engaged in especially complex transacting, such as a merger or acquisition, and for which private placement may provide the best outlet. The market for non-venture private equity is discussed in greater detail in the next section (Pension Funds and Middle Market Investing).
One way of capturing the not-entirely-clear distinction between venture and non-venture forms of private equity investing is by isolating their respective deal size preferences. In Canada, the current cut-off point has been estimated by market analysts and practitioners to be as low as $7 million and as high as $10 million, with venture capital assuming all or most disbursements below these thresholds and the non-venture version, those above. This estimate accords with several suggested for American private equity markets.Endnote 35