A type of investment opportunity in relatively mature companies that are going through some transformational event in their life cycle
What is Growth Equity?
Growth equity (also known as growth capital or expansion capital) is a type of investment opportunity in relatively mature companies that are going through some transformational event in their lifecycle with potential for some dramatic growth.
Uses of Growth Equity
Growth capital is utilized by businesses to subsidize the expansion of their operations, entrance into new markets, and acquisitions to boost the company’s revenues and profitability. Growth equity investors benefit from the high growth potential and moderate risk of the investments.
Growth equity deals generally imply minority investments. Such deals are commonly executed using preferred shares. Note that growth equity investors tend to prefer companies with low leverage or no debt at all.
Typical investor profiles in growth equity include private equity firms, late-stage venture capitalists, as well as investment funds (mutual or hedge funds).
Growth Equity vs. Venture Capital
Although growth equity may seem similar to venture capital, the two types of investments are different in a few ways. The key distinctions between the two investment opportunities include the following:
1. Holding period
Growth equity investments generally come with a lower holding period (on average, 3-7 years) compared to venture capital investments (average is 5-10 years). The rationale behind it is that early-stage companies simply need more time to realize their potential relative to more mature companies.
2. Source of returns
The primary source of returns for venture capital investments is the profitable introduction of the company’s products or services to the market. The source of returns for growth equity investments is the company’s ability to scale its operations, which results in significant revenue and profitability growth.
3. Risk profile
Unlike venture capital deals that come with a high level of risk, growth equity deals are generally considered investments with moderate risk. The high risk nature of venture capital investments is determined by the number of risk characteristics, most notably market and product risks. Such risks are associated with operations in new markets (market risk) and the absence of a commercially viable product.
Conversely, companies targeted in the growth equity deals generally operate in established and mature markets with a commercially viable product. However, the execution and management risks of such types of deals are still high.
Additional Resources
Thank you for reading CFI’s guide to Growth Equity. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:
FAQs
Growth equity funds target companies that have potential for scalable and renewed growth. Unlike buyout funds, they usually take a minority stake with the intention of growing the business as much as possible. But - like buyout funds - the goal is to exit at a higher multiple. Growth equity in a nutshell.
What is growth equity vs private equity? ›
Both Growth Equity and Private Equity present distinct opportunities and risks. Growth Equity focuses on the growth stages of a business, offering flexibility and lower risk. Private Equity allows for significant control and diversification, encompassing investments across various stages and strategies.
What stage is growth equity? ›
Growth equity managers pursue companies that are at a development stage between venture capital fund targets (early-stage businesses with limited historical financials) and leveraged buyouts (LBOs), mature companies with established track records of cash generation.
How does growth equity make money? ›
Growth equity investments generate returns primarily through growth. Unlike private equity firms, they do not typically generate returns through leverage.
How risky is growth equity? ›
Risk profile
Unlike venture capital deals that come with a high level of risk, growth equity deals are generally considered investments with moderate risk.
Is growth equity a buyout? ›
Growth equity funds target companies that have potential for scalable and renewed growth. Unlike buyout funds, they usually take a minority stake with the intention of growing the business as much as possible. But - like buyout funds - the goal is to exit at a higher multiple.
How much does growth equity pay compared to PE? ›
In growth buyout teams/firms, compensation at larger firms is generally a 15 – 20% discount to private equity compensation. So, if an “average” PE Associate earns $300K – $350K in total compensation, the average range might be closer to $250K – $300K at a growth buyout firm.
Is it hard to get into growth equity? ›
Networking into growth equity firms can be challenging. Not all firms or hiring managers are open to it – usually, not as a matter of firm policy, but rather some like to “outsource” the entire process to headhunters to manage all candidates inbound and outbound.
Is growth equity M&A? ›
Growth equity is a term used to describe minority investments in young and mature companies to help them implement their growth strategies. The growth strategies could include investing in new sales and marketing teams, expansion into new markets, and M&A transactions.
What is working in growth equity like? ›
Growth equity professionals will usually spend most of a typical day working on a model to determine the potential returns on the growth investment. The professional may use information from a confidential information memorandum (CIM) and discussions with management and industry experts to create the model projections.
Generally, the target internal rate of return for growth equity is 30 to 40% in the holding period of 3 to 7 years. Returns are most likely to come from revenue growth, profitability and strategic value, and the risk of capital loss is lower than VC's but higher than LBO's.
How big is a growth equity deal? ›
Investment Size: Growth equity investments are usually larger than venture capital investments but smaller than traditional buyout investments. They typically range from USD5 million to USD100 million or more. Ownership Stake: Growth equity investors usually take a minority stake in the company.
What is the holding period for growth equity? ›
On average, the holding period for growth-equity investments is three to seven years. That is compared to five to 10 years in venture capital. It takes more time for new companies to realize their potential.
What is the difference between growth and value private equity? ›
Where growth investing seeks out companies that are growing their revenue, profits or cash flow at a faster-than-average pace, value investing targets older companies priced below their intrinsic value. GARP investors also use intrinsic value to find growth companies that are attractively priced.
What is the difference between equity and private equity? ›
The term “private equity” denotes shares of owner‑ ship in companies that are not (or not yet) listed on a stock exchange. The term “public equity” refers to shares of companies that already trade on a stock exchange.
What is the difference between growth and equity? ›
While private equity (PE) typically focuses on mature businesses, often through leveraged buyouts and operational improvements, growth equity (GE) concentrates on companies that are poised for rapid expansion and have the potential to disrupt their respective industries.
What do growth equity associates do? ›
Growth equity associates are junior members of the investment deal team who take lead on performing diligence and execution tasks for so-called “active” deals. Their work is usually overseen by Senior Associates or Vice Presidents, who lead the diligence process.
