Bauer Wealth Blog

What is the Difference Between Private Equity, Venture Capital, and Hedge Funds?

Nov 27, 2019 4:06:00 PM / by Stephen Heitzmann

Learn more about Private Equity:

-Download our Private Equity eBook-


Your investment strategy should always align with your goals and current situation. It’s important to understand that different investment channels often serve different purposes. This article reveals the differences between Private Equity, Venture Capital, and Hedge Funds.


To the misinformed, these investment channels often get lumped together in a broad stroke of “Financial Services” unfortunately. And even to the well-informed, it can still be difficult to distinguish each clearly.

Let’s explore the differences between each to help determine the best investment strategy for you.

Private Equity vs. Venture Capital

Private equity and venture capital often get confused because they have many similarities. They both raise capital to invest in other companies, but they invest in different types and sizes of companies, invest different amounts of money, and have different levels of equity in their companies.

Private equity firms require high net worth individuals who raise capital for shares in companies, real estate, or some other form of equity that is not publicly listed or traded. Venture capital firms finance new companies and small businesses that have great growth potential. They also may offer technical and managerial guidance rather than a financial investment. 

What is the difference between Private Equity and Venture Capital?

The Type of Company

Private equity firms invest in all types of companies, while venture capital firms often have a niche, such as technology.


Private equity firms require higher percentages of the stake in the company because they work with more established companies. They regularly invest over $100 million in a single company. Venture capital works with new or smaller companies and typically spend $10 million or less in a single company.

Investment Structure

Venture capital uses equity to make investments and private equity firms use both equity and debt.


Venture capital firms regularly see companies fail, so they rely on finding a company that will take-off and quickly earn returns commensurate to pay for the ones that fail. Private equity firms often apply advanced risk management strategies because they cannot have any failed companies.

Ultimate Goal of Returns

Venture capital has to wait for companies to increase in value. Private equity firms speed up the process with financial engineering tactics like paying off debt and supplying cash.

Managerial Responsibilities

Private equity firms are more involved in the company’s business operations because they take more ownership than venture capital firms do. Private equity firms usually buy 100% ownership of the company, while venture capital firms invest in 50% or less of the business.


Private equity firms typically get paid more because they loan more money and their fees are higher.


Private Equity vs. Hedge Funds

Hedge funds are another type of alternative investment that aims for maximum profits in the shortest amount of time. Hedge funds use capital to employ different strategies to hopefully earn a return for the investor. Hedge funds focus on liquid assets to earn profits quickly in order to use the funds for another high returning investment. Hedge funds can be dicey because they can use borrowed money to increase profits, which is called margin. This type of investment does not run cheap; hedge funds typically charge 2% for asset management and charge 20% of the profits as fees.

Hedge funds invest in nearly anything that can make a lot of money in a short time period. Regular investments include stocks, currencies, derivatives, and bonds. Hedge funds are set up as a private investment with limited partnerships and require a large initial minimum investment. Only accredited investors are eligible to work with hedge funds because they don’t have as much SEC regulation as other types of funds. It is unlikely that a hedge fund would be accessible to any other type of investor.


What is the difference between Private Equity and Hedge Funds?

Private equity firms and hedge funds appeal to the same type of investor. Both types of funding require a high-net-worth individual or firm that can offer an immediate investment typically around $250,000. Both are also structured as limited partnerships and can charge a management fee in addition to a percentage of the profits. Other than that, private equity firms and hedge funds have substantial differences:

Investment Time Periods

Hedge funds aim to earn as much money as quickly as possible. Private equity firms focus on high profits over a long period of time. A private equity investment could last 5-7 years or longer while hedge fund investments can last anywhere from seconds to years.

Size of Capital Investment

Private equity firms can commit to however much they would like in an investment. Hedge fund investors will invest less money than a private equity firm that can be liquidated at any time. Hedge funds typically invest their money all in one go.

Compensation and Fee Structure

Private equity firms and hedge funds can both charge a management fee plus performance fees. Hedge fund fees are based on the concept of the high water mark, which is the highest value that an investment fund has ever reached.


Hedge funds are riskier than private equity because they aim to earn higher amounts of profit over a short period of time and often use derivatives to speculate on price.


Private equity firms and hedge funds must pay taxes each year and submit an IRA Schedule K-1. This document reports income, losses, and dividends of each partner. Short-term and long-term gains must also be reported to the IRS on a Form K-1 by both types of firms. Private equity investments, however, are not subject to short-term capital gains tax rates because they are so long-term.

Is Private Equity right for you?

Most investors steer towards private equity as a viable diversification strategy that is mostly detached from traditional markets. This can provide significant downside protection if executed properly. This downside protection, with the added potential for moderate returns makes Private Equity an attractive option to many high-level investors.


If you’re interested… Contact Bauer Wealth to see what private equity deals are currently available.

Topics: Private Equity

Stephen Heitzmann

Written by Stephen Heitzmann

Stephen Heitzmann is the CEO of Bauer Wealth Management, a Wealth Management Firm, based in Colorado Springs, CO. Bauer Wealth Management is a Registered Investment Advisor (CRD#: 152977/SEC#: 801-71090) with the Securities and Exchange Commission. This article does not represent an investment recommendation or endorsement of any kind. Please consult with your advisor regarding your specific situation. Investing in securities does involve risk of loss that clients should be prepared to bear. The risks can range from failing to keep pace with inflation to losing some or all of the money you invest.