Private Equity/Venture Capital

Correct Answer: Leveraged buyout (LBO) of a mature, cash-flow positive company

Leveraged buyout (LBO) of a mature, cash-flow positive company is the best answer among the given options for a private equity investment strategy. Private equity firms typically invest in established, profitable companies with strong cash flows. They use a combination of equity and debt (leverage) to acquire a controlling stake in these companies, with the aim of improving operational efficiency, cutting costs, and ultimately reselling the company at a higher valuation. Providing seed capital to a pre-revenue startup is more typical of venture capital investing, which focuses on high-growth potential but also high-risk early-stage companies. Investing in a diversified portfolio of publicly-traded stocks is a strategy employed by mutual funds or other public market investors, not private equity firms which invest in private, non-publicly traded companies.

Correct Answer: Private equity firms typically invest in mature companies, while venture capital firms invest in early-stage startups with high growth potential.

The key difference between private equity and venture capital firms lies in the stage of the companies they invest in and their investment strategies. Private equity firms typically invest in mature, established companies with stable cash flows. These firms often acquire a controlling stake in the company and focus on improving operational efficiency, reducing costs, and increasing profitability. Private equity investments are usually larger in size compared to venture capital investments. On the other hand, venture capital firms invest in early-stage startups with high growth potential. These startups are often in the technology or life sciences sectors and have innovative products or services. Venture capital firms provide capital to these startups in exchange for an equity stake, often a minority stake. They also offer strategic guidance, mentorship, and access to networks to help the startups grow and scale. Regarding the other answer choices: - Answer 256470 is incorrect because private equity firms typically acquire controlling stakes in companies, not minority stakes. Venture capital firms often take minority stakes in startups. - Answer 256471 is incorrect because both private equity and venture capital firms aim for long-term returns. Private equity firms focus on improving the operations and profitability of mature companies, while venture capital firms provide support to help startups grow and scale over the long term.

Correct Answer: To amplify returns on their invested capital

The primary reason for private equity firms to use leverage in their investments is to amplify returns on their invested capital. Leverage allows private equity firms to invest more capital than they have available, potentially increasing the returns if the investment performs well. However, it also increases the risk, as the firm is responsible for repaying the debt regardless of the investment's performance. Using debt to finance an investment does not necessarily reduce risk through diversification of the capital structure. In fact, it can increase risk by adding financial leverage. Leverage does not directly increase the liquidity of an investment. Private equity investments are typically illiquid, regardless of the use of debt financing.