Venture capital and Private equity whilst having some common attributes have a number of differences.
In order to understand and compare these alternate asset classes, one needs to analyse the various components.
Stage of investment.
Venture capital as a whole is generally made at a much earlier investment stage to that of Private Equity.Venture Capital, has different sub sections viz . Seed Capital, Series A, Series B, Growth Capital.
Most Private Equity funds will invest in Series B and in growth Capital stages of a pottential investment.
Series B is when the underlying investment starts to get proper traction in terms of revenue or customer acquisition.
By nature of the fact that Private Equity invests at a later stage , this should reduce risk. With the introduction of Sec 12J Venture Capital Funds, such as Grovest, the Investor is entitled to a Sec 12J Tax deduction, which allows 100% of the investment to be deducted from the investors Taxable income. This reduces the risk in the Venture Capital investment by up to 40%.
Venture Capital always has the benefit of better pricing. Generally entrepreneurs are desperate for funding and guidance, having used up all their Angel funding and need this funding to take the business forward.
Private Equity funds are more than happy to pay a far greater price for assets, as they will only invest in assets that have traction. They are therefore paying a premium for the asset as a result of the stage at which the business is in.
Both of these alternative asset classes are medium to long term investments.
As strange as it may appear , in a lot of cases Venture Capitalists sell their assets to Private Equity Funds once they have proven the concept and start to get traction.
Venture Capital is usually structured as an equity investment, whilst Private equity is usually done via debt instruments. With the debt their is normally an associated interest charge.
Venture Capital investments via an approved Sec 12J company such as Grovest, allows for the Sec 12J tax deduction in the hands of the investor. Capital gains are taxed in the hands of the fund. The return of the investment to the investor will be taxed as a recoupment. Surpluses will be distributed by way of dividends to the investor, which are tax free in the investors hands.
Private equity distributions will be subject to Capital Gains Tax In the hands of the investor. You cannot deduct the investment into Private Equity from the investors taxable income in the year in which the investment is made.
Board Representation and Management input.
Venture Capitalists are generally not lazy money, and in most instances sweat the asset with the entrepreneur. Venture Capitalists will assist the entrepreneur from a hands on perspective and plug them into their network. They generally attend weekly excos, as sit on their board in order to add value and ensure that the business is driven in the right direction.
Private equity houses generally take a seat on the enterprises board, and at year end board meetings only.
Both Venture Capital and Private Equity require monthly reporting from their investee companies.Venture Capitalists may require daily reporting of key metrics.
Whilst both these alternative asset classes have their merits, Venture Capital via an approved Sec12J Venture capital fund such as Grovest is our preferred choice of investment in this alternative asset class.