The Link Between Large Companies and Private Equity

In recent years, many commercial wars have broken out in the market, such as the short video war between Tiktok and Kwai, the online car hailing war between Uber and Lyft, and the e-commerce red envelope war. Behind this series of commercial competitions, capital plays a key driving role. Today, we will delve into the concept and role of capital, as well as the relationship between large companies and private equity investments.

What is capital?

Capital, in simple terms, refers to the investors behind large companies, usually private equity funds, also known as private equity in English. They mainly invest in private companies and sell them after the company appreciates, achieving a profit by buying low and selling high. Some famous private equity fund companies include Blackstone, KKR, Hillhouse Capital, and others. In China, private equity is usually a concept opposite to public offering, with a greater emphasis on consolidating investments.

Investment at different stages

The relationship between large companies and private equity investment is inseparable, and private equity investment usually covers different stages of a company's development. Firstly, there is the early stage, also known as venture capital. This stage usually refers to a company that has just been established and may only have a preliminary idea, new technology, or new product that has not yet undergone market validation. At this stage, the company needs funds to start. Venture capital funds specialize in investing in such early projects, with typically low valuations and relatively small investment amounts, typically around millions of dollars. Investors expect some of these projects to achieve returns of tens or even hundreds of times in the future.

After venture capital, the company may enter a growth stage, which refers to the initial validation of its creativity and the need to replicate and expand its business. At this stage, investment is often referred to as growth equity, and investors are more cautious because the company already has some operational data for reference and the investment amount is usually larger, ranging from several million to hundreds of millions of dollars.

With continuous rounds of financing, some companies eventually go public. But there are also some companies that have been financing themselves without going public. The definition and boundaries of these stages have become increasingly blurred, as it is difficult to clearly define the company's development. Ultimately, the company may enter a mature stage, where it reaches a relatively stable state with a clear business model and stable cash inflows. At this point, the company has become a decently large company.

Leverage and risk

Private equity investments typically require a significant amount of capital in order to gain control over the target company. Therefore, private equity companies often do not fully utilize their own funds and instead seek loans, which are known as leveraged buyouts. This approach is similar to the principle of buying a house loan. By borrowing, they can invest more flexibly and expect higher returns after the company appreciates. However, leveraged investments also come with risks, as the burden of debt increases, but if everything goes smoothly, the return may also be higher.

Requirements for private equity investors

Working in the field of private equity investment requires financial knowledge, operational management experience, and an understanding of the capital market. The professional requirements in this field are relatively high, so many people engaged in private equity investment have spent hard study and exercise in the field of investment banking.

The Role of Big Companies

In addition to private equity companies, some large companies are also involved in private equity investments. These companies typically have large capital reserves that can be used for mergers and acquisitions or stock repurchases. They may focus on areas related to their core business in order to achieve strategic synergies. The intervention of these giants may also trigger competition in the field, but it usually brings more investment opportunities.

Strategic investment and financial investment

When making private equity investments, investors can choose two different methods: strategic investment and financial investment. Financial investment aims to pursue financial returns, usually involving buying and selling shares of a company to gain capital appreciation. Strategic investment focuses more on how the company can bring added value to the parent company, usually involving the utilization of synergies. Both of these methods have practical applications, depending on the investors' goals and strategies.

Future Trends

The future of private equity investment is full of variables. With the development of technology and the evolution of the market, investment trends are also constantly changing. The role of large companies in the private equity sector may continue to increase, while the heat of the capital market may fluctuate. However, in the long run, successful private equity investments still need to focus on industries and companies that truly have the potential to create value.

Private equity investment is a field full of challenges and opportunities, involving multiple stages and strategies. Understanding the basic concepts and principles of this field, as well as the relationship between large companies and private equity investments, can help investors better understand its operation and its importance in the financial world.

Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.