Private securities are not publicly traded. They don't have market-determined quoted prices, and they are highly illiquid.
The most common investment strategies are:
- Venture capital is financing for privately held companies, typically in the form of equity in less mature companies, for the launch, early development, or expansion of a business. A venture firm must provide returns to its investors and has a long horizon to do so. Therefore, it has to make a high multiple on its investment and must hold out for a nice acquisition or an IPO. It must build the business from scratch to be able to carry a very high enterprise value.
- A leverage buyout (LBO) is the acquisition of a company or division of a company with a substantial portion of borrowed funds. A buyout fund seeks companies that are undervalued with high predictable cash flow and operating inefficiencies. If it can improve the business, it can sell the company or its parts, or it can pay itself a nice dividend or pay down some company debt to deleverage.
- A private investment in public equity, often called a PIPE deal, involves the selling of publicly traded common shares to private investors. Generally, companies are forced to pursue PIPEs when capital markets are unwilling to provide financing and traditional equity market alternatives do not exist for that particular issuer.