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title: "Private equity structures" description: "Venture capital, growth equity, and leveraged buyouts: the three PE models, how they create value, and what distinguishes them." sectionLabel: "PE Structures" order: 2

Private equity is not one strategy. It is at least three distinct strategies operating under the same label, each with different risk profiles, value-creation mechanics, and return expectations. The three: venture capital, growth equity, and leveraged buyouts.

Venture capital

Venture capital invests in early-stage companies with high growth potential and proportionally high failure rates. The VC Method governs how these deals are priced.

The core equation: Post-money valuation = Expected exit value / Required ROI.

Required ROI varies by stage because earlier stages carry higher failure rates and longer holding periods:

• Seed: 30x+ required ROI. Most investments will fail. The math only works if the winners are enormous.
• Series A: 15 to 20x required ROI. The company has product-market fit but has not yet scaled.
• Series B: 10 to 12x required ROI. Unit economics are proven. The question is whether the model scales.
• Late stage: 3 to 5x required ROI. The company is approaching liquidity. The risk is primarily execution and market timing.

A practical example: if a seed-stage company expects a $300 million exit in seven years, a seed investor requiring 30x would pay a post-money valuation of $10 million ($300M / 30x).

The power law governs VC fund returns. In a typical fund of 25 to 30 investments, one or two companies generate the majority of total returns. The rest return a fraction of invested capital or zero. This is why VC funds target such extreme multiples at entry: they are paying for the option on a power-law outcome.

Growth equity

Growth equity sits between VC and buyouts. The investor takes a minority stake (typically 20 to 40%) in a company that is already profitable or near-profitable, with proven unit economics and a clear path to scale. Unlike VC, there is no product-market fit risk. Unlike buyouts, there is minimal or no leverage.

The value-creation thesis is simpler than either VC or LBO: accelerate what already works. Growth equity investors provide capital for geographic expansion, product line extensions, sales team buildout, or strategic acquisitions. The return comes from revenue growth translating into multiple expansion at exit.

Leveraged buyouts

The LBO is the canonical private equity transaction. The sponsor acquires a controlling stake using a combination of equity (typically 30 to 40% of the purchase price) and debt (60 to 70%). The target company's own cash flows service the acquisition debt.

LBO value creation decomposes into three levers:

EBITDA expansion (~71% of value creation historically). The sponsor improves the company's operating performance: revenue growth, margin improvement, cost optimization, operational efficiencies. This is the largest driver of returns in the current environment.

Debt reduction (~19% of value creation). As the company generates free cash flow, it pays down acquisition debt. The equity value increases dollar-for-dollar with each dollar of debt repaid, because the asset value stays constant while the liability shrinks.

Multiple expansion (~10% of value creation). The sponsor exits at a higher EV/EBITDA multiple than the entry multiple. This was a dominant return driver from 2010 to 2021, when interest rates fell steadily and pushed asset multiples higher. In the current rate environment, multiple expansion is harder to rely on. The best sponsors have shifted their models accordingly: operational improvement now carries the weight that financial engineering used to.

Holding period and exit routes

PE holding periods have stretched. The median hold is now roughly five years, up from three to four years a decade ago. Longer holds compress IRR (because the same multiple is earned over more time) but do not necessarily reduce TVPI.

Exit routes: IPO, strategic sale (to a corporate acquirer), secondary sale (to another PE sponsor), and increasingly, continuation vehicles (where the GP transfers the asset from one fund to a new vehicle, often managed by the same GP). Continuation vehicles are controversial because they create conflicts of interest, but they are now a meaningful share of PE exits.

Why this matters for the weekly issues

When The Private Markets Ledger covers a deal, the structure tells you the thesis. A take-private at 12x EBITDA with 60% leverage is a classic LBO: the sponsor is betting on operational improvement and debt paydown. A minority growth investment at 25x revenue with no debt is a growth equity bet on market expansion. Reading the structure tells you what needs to go right for the investment to work, and what the specific risks are if it does not.