Do you know the difference between private equity and venture capital?
Private equity and venture capital are both alternative assets that can help accredited investors diversify their portfolios from public markets — with a few key differences. Join us as we break down the differences between the two!
Differences Between VC & PE: The Power Law, and More
One important distinction between these asset classes is how investors build their portfolios to increase the potential for outsized returns, specifically regarding the Power Law.
The Power Law argues that a small number of investments provide the majority of returns, and therefore, investors should build large, diversified portfolios to increase the potential of investing in successful companies.
In private equity, the Power Law isn’t really a factor. PE firms typically make larger investments in a smaller number of mature, distressed companies with favorable growth prospects. After a period of several years or longer, they look to sell the company at a higher price.
On the other hand, venture capital is a Power Law asset class. VC firms usually make many smaller investments in a large number of private, emerging technology companies. The goal is to build a well-positioned portfolio that earns most if its returns from a small number of successful exits, typically through M&A or IPO.
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