Companies that private equity firms hold an interest in
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What is a Portfolio Company?
A portfolio company is a company (public or private) that a venture capital firm, buyout firm, or holding company owns equity. In other words, companies that private equity firms hold an interest in are considered portfolio companies. Investing in a portfolio company aims to increase its value and earn a return on investment through a sale.
Summary
- Companies that private equity firms hold an interest in are considered portfolio companies.
- A financial sponsor and investors are required to create a private equity fund that invests in companies.
- Common approaches to investing in a portfolio company include leveraged buyout, venture capital, and growth capital.
The Private Equity Structure
The private equity structure can be summarized in the simple graphic below:
Creating a private equity fund, which invests in companies, requires two different parties: (1) a financial sponsor, and (2) investors.
1. Financial Sponsor
The financial sponsor is generally called the general partner. The financial sponsor manages the private equity fund and receives management fees and carried interest as compensation. Management fees are fees tied to the capital raised, while carried interest is a share of the fund’s profits.
2. Investors
The investors provide the capital required for the fund to invest in companies. Investors include high net worth individuals, family offices, endowments, insurance companies, pension funds, foundations, funds-of-funds, sovereign wealth funds, etc. Investors generate a return from their investment through the private equity fund selling portfolio companies at a higher price than the initial investment cost.
Approaches to Investing in Portfolio Companies
There are numerous methods of investing in a portfolio company. Below, we outline three common methods.
1. Leveraged Buyout (LBO)
A leveraged buyout (LBO) is extremely common in private equity transactions. An LBO involves using primarily debt (hence “leveraged” buyout) and a small equity injection to finance the company’s buyout. The debt is typically raised through using the portfolio company’s assets as security.
2. Venture Capital
Venture capital refers to the provision of capital by private equity funds to start-up companies that require early-stage funding in exchange for an equity stake.
3. Growth Capital
Growth capital refers to providing capital to established businesses to help expand business operations. The capital can be used to help a business develop a new product, restructure operations, finance an acquisition, or expand into new markets.
Common Types of Exits for Portfolio Companies
Investors in private equity funds generate a return through portfolio companies’ exit in the private equity fund. Private equity firms typically acquire companies for a specific period (usually five to seven years), with the end goal of exiting the investment through a sale above the initial investment price. Common exit strategies include the following:
1. Initial Public Offering (IPO)
An initial public offering of a portfolio company generally provides one of the highest valuations, compared to other exits, provided that public market conditions are stable and that there is strong demand. A key disadvantage with an IPO exit is the high transaction costs and potential restrictions placed on existing investors, such as a lock-up period requirement.
2. Strategic Sale
A strategic sale, also called a trade sale, is the sale of a portfolio company to a strategic buyer that can realize material synergies or achieve a strategic fit through the acquisition. Strategic buyers often pay a premium for the portfolio company due to the preceding sentence’s reasons.
3. Secondary Buyout
A secondary buyout is the sale of a portfolio company to another private equity firm. There may be many reasons to engage in a secondary buyout, such as the desire to get rid of the portfolio company or the portfolio company’s management wanting to find another private equity firm to operate with.
Examples
Prominent private equity firms in Canada include ONEX Partners and Novacap Investments, to name a few. The portfolio companies of ONEX Partners and Novacap Investments can be found here and here, respectively.
Additional Resources
Thank you for reading CFI’s guide to Portfolio Company. To keep learning and advancing your career, the following resources will be helpful:
FAQs
A portfolio company is a company or entity in which a venture capital firm, a startup studio, or a holding company invests. All companies currently backed by a private equity firm can be spoken of as the firm's portfolio.
What is an example of a portfolio company? ›
Examples of portfolio companies include family offices, pension funds, sovereign wealth funds and insurance companies.
What is meant by portfolio of a company? ›
A business portfolio is defined as a collection of products, services, and other company divisions. This portfolio can also be referred to as the company's set of accessible resources that it uses to achieve its goals. It consists of investments, holdings, products, businesses, and trademarks.
Who owns a portfolio company? ›
A portfolio company is a business in which a venture capital firm, buyout firm, or holding company owns equity, with the goal of increasing its value and earning a return on investment through a sale or an Initial Public Offering (IPO).
What is the difference between a fund and a portfolio company? ›
A portfolio is a collection of funds (or sometimes other investments) owned by an individual. A fund is a pool of investments (usually shares) that is managed by a professional fund manager.
What is considered a portfolio company? ›
A portfolio company is a company or entity in which a venture capital firm, a startup studio, or a holding company invests. All companies currently backed by a private equity firm can be spoken of as the firm's portfolio.
Can a portfolio company be public? ›
A portfolio company is a company (public or private) that a venture capital firm, buyout firm, or holding company owns equity.
How to create a company portfolio? ›
How to design a business portfolio in seven steps
- Define your business strategy. ...
- Identify Strategic Business Units (SBUs) ...
- Develop a comprehensive portfolio template. ...
- Use the BCG Matrix. ...
- Align with market dynamics. ...
- Leverage visualisation tools. ...
- Establish and monitor metrics.
A business portfolio can include a variety of components, such as a company's products, services, investments, and brands. It can also include information on past projects, business strategy, and company performance, as well as any industry awards or certifications the company has received.
Who is a portfolio owner? ›
A Portfolio Owner is as senior manager responsible for the commercial success of the product portfolio. He formulates and prioritizes the strategic themes of the organization (i.e. Portfolio Backlog) and supports the Organizational Product Owner in detailing tactical goals or requirements (Epics and features).
There are four key components to starting a portfolio company startup:
- An entrepreneurial team with a track record of success.
- A market opportunity that is large and growing.
- A business model that can scale to reach that market opportunity.
- The ability to raise capital to fund the startup.
The funds and fiduciary are not part of the same corporate family as the portfolio company (think KKR or Blackstone and a company their managed funds buy). A subsidiary is generally owned directly by a parent company and is in the same corporate family as the parent (think GE Corporation and GE Health).
What is an eligible portfolio company? ›
(46) “Eligible portfolio company” means any issuer which— (A) is organized under the laws of, and has its principal place of business in, any State or States; (B) is neither an investment company as defined in section 80a–3 of this title (other than a small business investment company which is licensed by the Small ...
What is the meaning of company portfolio? ›
A business portfolio is a document that contains important information about an organisation, including details about what the organisation does, its goals, available assets and mission. Business leaders can use portfolios to organise information and make informed decisions.
Why do investors make portfolios? ›
What is the purpose of having a portfolio? Portfolios provide a framework for your money. They help you oversee and manage your investments. A portfolio can help you diversify your assets and spread your risk across stocks, bonds, and other types of investments.
What is the difference between a stock and a portfolio? ›
A portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange-traded funds (ETFs). People generally believe that stocks, bonds, and cash comprise the core of a portfolio.
What is an example of a brand portfolio? ›
A brand portfolio is a group of brands that are part of a broader “brand umbrella” or “house of brands” created by a business, corporation, or conglomerate. The Coca-cola company is one of the best-known brand portfolios. Of course, the Coca-cola company's most famous brand is its flagship beverage, co*ke.
What is portfolio with examples? ›
A portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange-traded funds (ETFs). People generally believe that stocks, bonds, and cash comprise the core of a portfolio.
Who is an example of a portfolio entrepreneur? ›
Even entrepreneurs who've stuck to one company tend to become portfolio entrepreneurs if that company becomes hugely successful – by producing multiple companies within their company – Jeff Bezos, Bill Gates, James Dyson, the Google founders.
What are Blackstone's portfolio companies? ›
Blackstone Group Inc's top holdings are Cheniere Energy Partners, L.P. - Limited Partnership (US:CQP) , Energy Transfer LP - Limited Partnership (US:ET) , Corebridge Financial, Inc. (US:CRBG) , Gates Industrial Corporation plc (US:GTES) , and Chesapeake Energy Corporation (US:CHK) .
