A portfolio company is a private business that receives investment from an investment firm, which can take the form of private equity or venture capital. Investment firms research companies in need of capital and build an investment portfolio from pooled resources. Portfolio diversity helps mitigate risk.
A portfolio company is a company that represents a specific investment to an investment firm that specializes in investing in private businesses for the purpose of raising capital in or buying those businesses. All the companies in which a company invests represent a company’s portfolio. Investment in a portfolio company can take the form of private equity in established companies or venture capital in start-ups. Mutual fund managers try to create a portfolio of companies that maximizes the earning potential for their investors while limiting risk.
The stock market, in which investors buy and sell shares of public companies, is just one form of investment opportunity for individuals. Another form of investment comes from large investment firms that dedicate their funds to private companies that need capital. These companies often need business capital to finance a new initiative, upgrade equipment, or simply survive. Business investment in these companies typically requires significant capital, but only a lucrative portfolio company can return this capital many times over to investors.
In general, the process by which a portfolio company is targeted is initiated by investment firm managers who specialize in researching companies in need of capital and deciding whether those companies have growth potential. These investment firms typically pool the resources of many investors, who are required to make a significant capital investment simply to participate in the opportunity. The investment firm then begins to build an investment portfolio out of these funds.
Most mutual funds try to create portfolios that offer diversification to their clientele. This means that the portfolio companies will be selected from a wide range of industries and may represent a wide scope in terms of their market positions. One portfolio company might be a well-established middle-market company that simply needs a boost of capital to get through a tough patch, while another might be a start-up with minimal track record but a great idea that needs capital to get off the ground. in action.
By exposing investors to different levels of risk and potential reward, portfolio managers can effectively de-risk the investment as a whole. Portfolio diversity means that the failure of a single portfolio company, or even a few, can be mitigated by positive returns from well-performing portfolio companies. It should also be noted that companies can be targeted for different reasons, as some are meant to get equity shares for investors, while others are meant to be bought out outright.
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