Investment Strategies

If we’ve learned anything from the previous modules, it is that the world of alternative investments is multifaceted, to say the least. While there are some similarities to the public markets, there are innate differences that set them apart.

The intent, of course, remains the same — to create value. The process, however, is completely different.

Private market investors deploy a variety of strategies to drive value creation and achieve substantial returns on their investments. Unlike the venture capital approach, which primarily focuses on early-stage companies with high growth potential, PE encompasses a broader spectrum of investment techniques suited to different stages of a company’s lifecycle.

This module will dive into the five main investment strategies in the PE space — venture capital, growth equity, leveraged buyouts, secondary markets and co-investments. Each of these strategies plays a crucial role in the value creation waterfall.

Foundation – Venture Capital (VC)

At the beginning of the waterfall, startups are just beginning to take form. This is where venture capital investments come into play. They focus on startups and early-stage companies.

The emphasis, at this level, is mainly on product development. These investments are high-risk and high-reward in nature. Value is created through technological advancements and building brand recognition.

VCs want to make sure that the startups are stable and shock-proof before launching them off the cliff and down into the lake. If the startup survives, it will slowly gain speed throughout the waterfall’s trajectory.

Acceleration – Growth Equity

This is when the waterfall starts to speed up. As companies progress beyond the early stages, growth equity investments provide the dry powder required for acceleration. Value creation here is driven by rapid revenue growth and operational scaling.

At this next stage, companies have proven products or services but require capital to scale operations. There are several paths they can take, and growth equity investments help them lock down on a direction and strap down for the ride.

Transformation – Leveraged Buyouts (LBOs)

By the time the company reaches the next level in the value waterfall, it has been beaten and moulded into a completely new entity. In the transformative stage of LBOs, PE firms acquire companies. They often use significant amounts of leverage, leading to the name leveraged buyouts.

Essentially, companies are merged to become stronger and more durable. They gear up for the impending crash into the lake. The focus shifts to operational improvements and strategic repositioning to improve profitability and cash flows. The aim is to optimise the business’s core operations so that it can survive on impact and float back to the surface.

Liquidity – Secondary Markets

At this stage, the company has entered the lake. Investments in the secondary market provide liquidity, allowing investors to buy and sell existing stakes in PE funds or companies. This ups the stakes and allows the entry of a larger number of investors. This stage offers a pathway for early investors to exit part or all of their investments.

The company reaches a more stable speed and embraces the flow of the secondary markets.

Synergy – Co-Investments

The next stage allows for the inflow of more participants. Co-investments allow investors to directly invest alongside PE firms in specific deals.

This strategy has a two-fold advantage. Firstly, it leverages the expertise and networks of PE firms and their partners. Secondly, it focuses on creating synergies and provides additional capital for strategic investments.

It’s crucial to understand, however, that not all investment strategies are suitable for every market condition or investment opportunity. Not every investment will flow through all these stages; the path depends on the company’s specific needs, market conditions, and the strategic vision of the investors. Factors such as market maturity, regulatory environments, economic cycles, and company-specific circumstances influence the applicability and potential success of each strategy.

For instance, LBOs might thrive in stable markets with accessible financing, whereas growth equity could be more suited to environments where companies are looking to expand aggressively without leverage constraints.

In this module, we’re going to deep dive into the different strategies and figure out the nitty-gritty of how they work. Each of the subsequent chapters will be devoted to a particular strategy in detail. So, stay tuned to know more!