Private equity funds typically fall into one of four categories based on the companies they invest in, notes Robert Almeida, senior vice-president and portfolio manager at Portland Investment Counsel in Burlington, Ont. They are:

  1. Venture: A new business with limited experience; sold on growth potential;
  2. Growth: An existing, proven business; investors help it pursue a growth strategy, such as building a new plant, or M&A activity;
  3. Distressed: The underlying business is strong, but it has a temporary cash problem; investors fill the gap;
  4. Buyout: When a company’s purchased from its existing owner; this uses leverage strategies to optimize the company’s capital structure.

Also on offer are specialty funds by sector, such as infrastructure and real estate.

Sam Sivarajan, head of investments at Manulife Private Wealth (he’s now senior vice-president of Wealth Solutions at Great-West Life, as of 2017), says risk level varies across categories. “Venture capital is on the high end of the risk spectrum because you’re betting on technology or a business model that may not be proven.”

Leveraged buyouts have less risk, he suggests. In these cases, the manager is looking for mid-market, old-economy companies (manufacturing, for instance) that are family-owned and may not have an optimal operating or capital structure. “Private equity managers come in and get it right, and use their networks and relationships to build more revenue opportunities.

“Risk and return are highly correlated. The potential for a tenbagger [an investment that appreciates by 10 times] is higher with venture capital than it is for leveraged buyouts.”