With the rise in popularity of private equity and their strategies from your finance friends, or the casual political speech, you probably heard of the words ‘growth equity’ along the way. While there are some key differences between the two, which we will get into, growth equity is quickly forging its path in the private investment world, and some extremely sharp investors are taking advantage of the rise in popularity and making a name for themselves in this freshly defined industry.
Growth equity is used by companies to facilitate the growth of their current operations, get exposure into additional verticals, and even to inorganically acquire other companies with a similar value proposition.
As the line between venture capital and private equity continued to blur with Series D and up funding rounds and minority growth-focused rounds in private equity, growth equity has drastically increased its popularity over the past ten years.
Investors that provide growth capital are typically minority investments into companies that still contain a high amount of growth potential, have little debt, yet have an established presence in their market to relieve some of the typical venture-esque risk profile.
Because growth equity is a near-perfect blend between the two, it can be challenging to determine which is which, a lot of the time investors may not have a strong understanding if their investment strategy is broad and generalistic.
Early-stage venture capital has the highest risk profile due to the companies having the least amount of traction within their market, which in turn makes the venture investment much more fruitful when it becomes a powerhouse in its industry. Private equity is the opposite - making a safe investment into a company with strong fundamentals, an established team, and years of financial data that shows its stability and more limited growth potential.
Growth equity is an exact mix between the two, early enough that the return on investment has more room to run, while also being established enough that they won’t simply run out of money and have to shut things down. As with any investment, there are still traditional risks to be aware of, primarily execution, new market, and management risks. This is why growth equity investors, although having a minority stake in their company, are providing value in ways that can continue to facilitate growth since the investment stake is larger and there is more of an incentive to lend a hand.
As a go-to rule, private equity investments last 3-5 years, venture capital investments take 5-10 years, and growth equity is in the middle at a 3-7 year expected investment timeline.
As mentioned, PE will invest in a majority stake to drive their value creation, while venture capital and growth equity are preferential to minority stakes to help ease their risk amount across the portfolio, and ensure they can write more checks per fund.
At this late (but still growth) stage for the portfolio company, the management team will rely on investors to not take a passive approach, and provide them with operational oversight, introductions to key partnerships, and achieving economies of scale with other portfolio companies in similar verticals. These value-add resources are often what will be the deciding factor in a company’s success, and founders will place a great deal of weight on which investors are the right fit to invest with them.
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