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.
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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Important notice: This content is for informational purposes only. Moonfare does not provide investment advice. You should not construe any information or other material provided as legal, tax, investment, financial, or other advice. If you are unsure about anything, you should seek financial advice from an authorised advisor. Past performance is not a reliable guide to future returns. Don’t invest unless you’re prepared to lose all the money you invest. Private equity is a high-risk investment and you are unlikely to be protected if something goes wrong. Subject to eligibility. Please see https://www.moonfare.com/disclaimers.
Growth capital (also called expansion capital and growth equity) is a type of private equity investment, usually a minority interest, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a significant acquisition without a change of control of the ...
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.
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.
Growth equity investments generate returns primarily through growth. Unlike private equity firms, they do not typically generate returns through leverage.
Summary. Growth equity involves investing in rapidly growing, privately held, established businesses. While every investment carries risk, growth equity can generate high returns, mainly through growth. Investing in private-market opportunities can also mitigate risk through diversification.
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.
While growth refers to the increase in national income over a long period of time, equity refers to an equitable distribution of this income so that the benefits of higher economic growth can be passed on to all sections of the population to bring about social justice.
A growing-equity mortgage (GEM) is a variation on a fixed-rate mortgage where additional principal payments are pre-scheduled and increase over time, often at 5% a year. The additional payments allow the mortgage to be paid off quicker and with lower total interest payments.
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.
Growth stocks usually pay either low dividends or zero dividends at all. It is because growth companies are growing at a very fast pace, and hence typically want to reinvest their retained earnings back into the company to boost the revenue-generating capacity of the business.
The hours in growth equity can vary quite a bit, depending on the specific role and company. However, in my experience, most pre-MBA roles (i.e. analyst or associate) will usually range from 55-65 hours. Employees often have to work on weekends, and it is not uncommon for them to work late into the night.
Carried interest, or “carry”, is contingent compensation that accrues to members of the firm based on the performance of its investments. In most cases, carry is reserved for partners or senior investment professionals.
The focus on market analysis is one of the distinguishing characteristics of growth equity interviews. This question can come in many forms – from “what makes an attractive market” to “what markets do you like right now” – but it's almost a certainty that you'll be asked about markets during your interviews.
Growth and value are two fundamental approaches, or styles, in stock and stock mutual fund investing. Growth investors seek companies that offer strong earnings growth while value investors seek stocks that appear to be undervalued in the marketplace.
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.
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.
Calculate the absolute change: Knowing the original value and the new value is essential for finding the absolute change. The formula is Absolute change = New value - Previous value. Use the original value for dividing the absolute change: You can get growth rate by dividing the absolute change by the previous value.
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