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An Equity Fund of Their Own

As private equity heats up, a new breed of smaller funds is taking center stage in today's market.

Guhan Swaminathan was making a good living in the world of high finance, buying and selling companies for financial titan Goldman Sachs and later for WestBridge Capital Partners. But as an employee of a large firm, "a lot of the entrepreneurial excitement of making these investments was gone," says Swaminathan, 32. So in 2005, he and colleague Hemanth Parasuram, 30, started Virgo Capital, a private equity firm that closed its first fund of $50 million last year.

Private equity investors fall into the same investing category as VCs in that they give money and advice to growing companies in exchange for equity. But VCs put money into early stage companies in hopes that they'll receive a big payoff down the road, while private equity firms look at more established companies that will give them a clear exit strategy. They make fewer investments and look to cash out--perhaps by selling the company or going public--within about five years.

Company owners can often get more money and deal with less red tape if they take the private equity route rather than going public. And because of the recent rise in private equity investing, Swaminathan isn't the only one going from employee to entrepreneur. Since 2002, about a hundred new private equity funds have launched each year--although many aren't startup ventures--and have raised, in total, about $64 billion, according to Thomson Financial.

With so many private equity firms awash in cash and looking for companies to invest in, the competition to secure deals has increased for those starting their own funds. Kevin Keenley, 40, who founded Fundamental Capital in 2004, says that, like all entrepreneurs, owners of private equity firms need to find their own niches. Case in point: Even though he's based in technology-rich San Francisco, Keenley mines for smaller companies outside the tech arena, including those in manufacturing and distribution. Meanwhile, Virgo's tactic is to look for technology companies in underserved markets in the Midwest and Southwest.

Both Keenley and Swaminathan note that being able to talk with company owners as fellow entrepreneurs rather than as employees is an asset because business owners must often choose between dozens of potential investors. "We like to think of ourselves as entrepreneurs primarily because we can relate to the people we invest [in]," says Swaminathan. "There are risks they take on a [daily] basis that a lot of investors working for bigger funds don't understand. We have a better sense of that."

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This article was originally published in the October 2007 print edition of Entrepreneur with the headline: An Equity Fund of Their Own.

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