![]() ![]() The call option analogy of private equity concurs with the power law of returns, i.e., 80% of returns come from 20% of investments. The risks are high, but the expected returns are much higher. The expected payouts of private equity investments resemble the payouts of long positions in out-of-the-money (OTM) calls. It finances both the long-term and short-term capital requirements of private enterprises. PE has a long investment horizon that needs endurance, foresight, and oversight. Private equity provides long-term capital for a business that does not have the track record to raise capital from the traditional capital markets and financial institutions. Almost every large company started as a small, privately-owned business. ![]() Distressed debt: Investments in debt of insolvent companies.Mezzanine financing: Investment in any financial instruments between senior secured debt and common equity.Buyouts: Private acquisition of established public companies.Venture Capital (VC): The financing of new enterprises.The chartered alternative investment analyst association divides the private equity asset class into four different categories: Angel investing refers to venture capital in the pre-seed or seed stage. But the term generally refers to investments made in the early stage or late stage. Such acquisitions are called buyouts. Venture capital refers to investments in new enterprises. But the term generally refers to acquisitions of well-established companies. Private equity (PE) can be used to refer to any investment in private companies.
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