Perhaps the proof is in the pudding or playing the game. At an amateur level, it is not difficult for anyone to learn how to play all four of these games. But at the top level, I can’t remember any player who has played and performed at the top level in more than one of these games. Though I reckon there will have been some players of Aussie Rules Football who have also played Rugby at a national level.

One reason for this could be that since one has already achieved great success in one game, it is unlikely that he would take a risk and venture into another game. This is a credible argument and it also ties in with the Management Theory on Core Competence. But perhaps it is also because the games are so seriously different in terms of how you play the game, the strategies for playing the game and the requirements for playing the game. But I will leave risk and risk management to Ganesh.

A final example on this, the great Michael Jordan was legendary and simply unstoppable on the basketball court. Even in his second comeback with the Washington Wizards at the age of 38, he still averaged more than 20 points per game in the two seasons. But even he would not want to be reminded about his baseball stint.

So why am I over elaborating this point ? And what does this have to do with the investment fields of Public Equity, Private Equity and Venture Capital ?

Well, to me, these three types of investment are essentially different ball games, just as Soccer, American Football, Aussie Rules Football and Rugby are. No matter that there are some pretty strong similarities, the way you play, strategies and what you require for each of these three types of investment are very different.

Of course if you are an intelligent and financially savvy person, it is plausible that you can pick up expertise in these three areas, but to my limited knowledge, I can’t remember any investor who has invested and returned at the top level in more than one of these investments. Though to be fair, some venture capitalists have found some success in the private equity game and vice versa. But these are exceptions rather than rule of thumb.

So sit back, relax and allow me to highlight some of the differences between these fields of investment. I will start by comparing Public to Private Equity and then try to separate Private Equity and Venture Capital. A quick clarification here in that a lot of these terms like Private Equity and Venture Capital can be used loosely and can overlap. I have used a broadly accepted definition of both, but be aware of the overlap that you may encounter out there.

Public Equity versus Private Equity

Well the obvious difference in these two fields of investment is the play on public and private. By something being public, it means that it is open to almost everybody and anybody. And by something being private, it means that it is restricted to only select individuals. This contributes to the biggest difference between the two and that is liquidity of investment.

For the Public Equity manager, he truly values liquidity as liquidity means it is easier for him to buy and sell the equity. For the Private Equity manager, when he invests in the equity, there is usually no liquidity in the equity. This is because it is likely that it is not quoted on any stock exchange. But this does not mean that he does not value liquidity the way the Public Equity manager does. Rather he is risking the short term illiquidity for a long term return when the company eventually gets quoted on a stock exchange or get sold to another company. Private companies tend to be valued at a 20-30% discount as compared to publicly quoted peers.

This leads logically on to the next point, that the time horizon of the Private Equity investment can be much longer than that of public equity investment. A typical timeframe for Private Equity is 3-5 years, while that of public equity could be a few days or weeks or a few months. Of course there are always exceptions to the rule.

In term of finding deals, Private Equity fund managers develop a sourcing network given that information is usually limited and available only to a select few. This network could be a range of industry contacts, middlemen or alumni. The deals come via a referral from this network. The Public Equity fund manager on the other hand has much more information on his potential investments. There is considerable publicly available research and information from research analysts and information providers like Bloomberg. So really the Public Equity fund manager combs through the information available and picks his equities for investment.

In making investment decisions, the Public Equity is much faster and could rely on trading information as well as fundamental information on the company. A Public Equity fund manager can just buy equities from his own allocation of funds in a few clicks of the keyboard or a phone call. This is after he has analysed his information and picked his stocks. Settlement is usually automated. For the private equity fund manager, his investment process is usually more long drawn. After initial evaluation of the deal, he usually does extensive due diligence and structuring of the deal. He probably has to obtain some form of committee approval (collective decision making) and get through serious legal documentation before the deal is done. Of course if the Public Equity fund manager buys shares through a share placement, some amount of legal documentation is required, but this is usually more standard than Private Equity documentation.

And finally what do the fund managers do post-investment ? The Public Equity fund manager probably monitors the equity’s performance on the stock exchange and relevant news on the company or industry. This is usually from an onlooker perspective. The Private Equity fund manager on the other hand can be very actively involved in the company. He probably sits on the board of directors in the company to guide the company on a strategic level. Some more active fund managers could even be involved in the daily operations of the company and attend important meetings with the company’s management.

So as you may appreciate, these are two very different games that the public and Private Equity manager play. Of course there is overlap in the use of valuation techniques and industry knowledge. But the way each game is played, and the strategies and some requirements for playing each game are quite different.

Private Equity versus Venture Capital

Next up is Private Equity and Venture Capital. This one as mentioned earlier is confusing as they can be inter-used and also because private equity is also the all-encompassing umbrella. So in private equity investments, there are the following sub-categories :
- Venture Capital
- Private Equity (also a sub-category)

Venture Capital investment refers to investing in startups. Startups are companies that are recently formed and tend to have little or no revenues, not to mention profit. In their lifespan, if successful, they will see exponential growth year-on-year in terms of revenues and manpower, almost like a zero-to-hero phenomena. Profitability will also kick in and grow exponentially. Usually these companies tend to be highly innovative in terms of technology, know-how or business model.

Private Equity investment refers to investing in established companies. Established companies have a decent track record in terms of financial performance and tend to have substantial revenue. Profitability can vary. Revenues and manpower tend to be more flat or show more gradual growth, with the exception of expansion/growth equity. In this case, revenues and manpower will grow quite significantly, but not in the same league as the zero-to-hero phenomena like in Venture Capital investments. Usually these companies span the whole industrial horizon but are common in the fact that they are established companies, with a financial track record.

The main difference lies in this. When evaluating a Venture Capital deal, the fund manager is trying to judge the potential viability of the company’s products/services. While in a Private Equity deal, the fund manager is trying to ascertain the underlying value of the company.

And following from this, how the investment is structured, the due diligence that needs to be done and the value add of the fund manager will be accordingly difference.

Eventually a Venture Capital deal should in its successful lifespan turn into a Private Equity deal and then possibly into a Public Equity deal. While we can see and appreciate them as different ball games, we can also view them as different parts of the assembly line.