Growth Equity
(also known as growth capital or expansion capital)
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 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.
Who Invests in Growth Equity
Institutional Investors
Pension Funds
Endowments and Foundations
Sovereign Wealth Funds
Family Offices
High-Net-Worth Families
Fund of Funds
Investment Vehicles
Corporate Venture Arms
Strategic Investors
High Net Worth Individuals
Let’s Compare
| Growth Equity | Venture Captial | Private Equity | |
|---|---|---|---|
| TARGET COMPANIES | •Mature with established products & a stable revenue. •Focus on scaling and expanding operations | •Early-stage startups. •Developing products not yet ready & not quite profitable. | •Undervalued or in need of strategic improvements •Proven business models with steady revenue streams. |
| RISK AND INVESTMENT SIZE | •Lower risk compared to venture capital •Larger investments aimed at acquiring significant equity to support business growth. | •Higher risk with smaller investments, such as seed capital or Series A funding. •Aims for high returns despite a higher rate of failure. | •Risk is generally lower. The companies are more established. •There are still risks related to business performance and market conditions. •Substantial investments, often targeting larger amounts of capital compared to early-stage venture capital. |
| INVESTMENT ROLE AND EXIT STRATEGY | •Less hands-on approach, focusing on capital for expansion. •Typically seek gradual exits through secondary sales or strategic mergers. | •Play an active role in guiding startups, seeking high-growth exits like IPOs or acquisitions. •Aim for significant returns in a shorter time frame. | •Investors actively manage and improve companies •Aim for exits through public offerings or sales to achieve substantial returns. |
The Investment Process
1. Sourcing and Screening
Researching and identifying potential investment opportunities then accessing the company’s market potential, financial health, growth trajectory, and fit with the investor’s strategy.
2. Due Diligence
Due diligence involves analyzing a company’s financial health, operational efficiency, and market potential to evaluate its overall viability and growth prospects.
3. Valuation and Deal Structuring
To negotiate investment terms, a company valuation is required under a variety of different methods. Following the valuation, begins the process of structuring the investment involving the determination of the capital amount, equity stake, investor rights, exit strategy, and performance milestones
4. Investment Decision and Agreement
The investment committee reviews the due diligence, valuation, and deal terms before approving the investment, after which the investment agreement is finalized with legal documentation and terms outlining the rights and obligations of both parties.
5. Post-Investment Support and Monitoring
Growth equity investors provide strategic support and guidance to help scale the company while regularly monitoring performance through financial reports, board meetings, and KPIs to track progress and address challenges.
6. Exit Strategy
Planning involves developing an exit strategy, such as a public offering or sale, based on market conditions and company performance, while execution entails managing the sale process, negotiations, and transition.
Benefits of Investing
1. Mature, Proven Companies
Researching and identifying potential investment opportunities then accessing the company’s market potential, financial health, growth trajectory, and fit with the investor’s strategy.
2. Scalable Opportunities
Due diligence involves analyzing a company’s financial health, operational efficiency, and market potential to evaluate its overall viability and growth prospects.
3. Strategic Impact
To negotiate investment terms, a company valuation is required under a variety of different methods. Following the valuation, begins the process of structuring the investment involving the determination of the capital amount, equity stake, investor rights, exit strategy, and performance milestones
4. Strong Return Potential
The investment committee reviews the due diligence, valuation, and deal terms before approving the investment, after which the investment agreement is finalized with legal documentation and terms outlining the rights and obligations of both parties.
5. Diversification
Growth equity investors provide strategic support and guidance to help scale the company while regularly monitoring performance through financial reports, board meetings, and KPIs to track progress and address challenges.
Risks of Investing
1. Market and Competitive Risks
Even established companies can face significant challenges from market fluctuations, evolving competitive landscapes, and changing consumer preferences, which can impact their growth and profitability.
2. Execution Risk
The success of growth equity investments relies on the company’s ability to effectively execute its growth strategy. Failure to scale operations, manage increased complexity, or meet performance milestones can jeopardize returns.
3. Valuation Risk
Determining the appropriate valuation for growth equity investments can be challenging. Overvaluation may lead to diminished returns if the company doesn’t achieve anticipated growth or if market conditions change.
4. Management Risk
The effectiveness of the company’s management team is crucial. Weak leadership or poor strategic decisions can hinder growth and affect the investment’s success.
5. Exit Uncertainty
While growth equity investments aim for substantial returns, achieving a successful exit can be uncertain. Factors such as market conditions, timing, and the company’s performance can impact the feasibility and profitability of the exit strategy.
