Growth Equity

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.

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Growth equity in a nutshell

• Target companies. Growth equity funds target companies that have high organic growth rates and an established business model. Target companies demonstrate potential for scalable and renewed growth.
• Investment type. Growth equity funds make mid-sized investments to take minority stakes, but negotiate protective rights for their investors such as board representations or change of control provisions.
• Value-add operations. Growth equity managers will typically look to add value by providing capital for growth and expansion. They will also provide strategic advice to management teams and help scale operations.
• Exit strategies. Growth equity managers help with the exit process either by way of an IPO, share buyback or sale to another private equity fund.

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What is growth equity?

Growth equity managers focus on purchasing minority stakes in fast-growing businesses that have surpassed the startup stage - earlier than buyout funds but later than venture capital funds. While growth equity managers acquire minority stakes and leave control to current owners, they will negotiate protective rights for their investors such as board representation and change of control provisions.

Target companies are typically middle-market companies that have high organic growth rates and established business models with upside potential. Growth equity managers add value to companies by providing capital for growth and expansion, including areas like production capacity, new products and sales efforts.

Typical exits for growth equity funds are by way of a sale to another private equity fund, a share buyback or - for larger companies - an IPO.

How do growth equity managers add value?

Revenue growth: By optimising sales efforts, scaling production, identifying growth avenues in new geographies or products. Managers can also leverage their network to introduce new, significant business partners and clients to the target company.

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Margin improvements? While growth equity managers do aim to improve margins, the lack of control and focus on top-line growth means that they rarely carry out the large restructuring and optimisation efforts that buyout managers are known for.

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Enhancing management: While they do not have a controlling stake - so cannot simply insert a new CEO as buyout funds might - growth equity managers can leverage their networks to complement existing leadership.

Exit planning: Growth equity managers take an advisory role in guiding companies through potential exit avenues including IPO, strategic sale or buyback.

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