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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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.
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.
How does growth equity work? ›
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.
What is the difference between PE and growth 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.
How risky is growth equity? ›
Lower Risk Profile Relative to Buyouts and Venture.
While growth equity investments are generally minority positions, they typically involve low or no leverage, are senior to management's equity ownership, and have a full set of protective shareholder and governance provisions, thus mitigating downside risk.
How much do you get paid in growth equity fund? ›
Growth Equity Salary. $69,000 is the 25th percentile. Salaries below this are outliers. $120,000 is the 75th percentile.
How do growth equity funds make money? ›
Growth equity firms invest in companies with proven business models that need the capital to fund a specified expansion strategy as outlined in their business plan. Similar to early-stage start-ups, these high-growth companies are in the process of disrupting existing products/services in established markets.
Is growth equity lucrative? ›
The companies seeking out growth equity are usually stable and profitable, with the main investment risk coming from the growth strategy rather than the existing business model.
Is a growth fund equity or debt? ›
Getting Started with Growth Fund:
Equity funds are highly risky as compared to debt fund, but the returns from the former are high. Talking about the equity funds, investors can either opt for growth or dividend option under this.
What is the holding period for growth equity? ›
Growth equity investment aims to keep risks to the minimum while generating similar returns to venture capital. Generally, the target internal rate of return for growth equity is 30 to 40% in the holding period of 3 to 7 years.
What do you need to know about 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.
An attractive growth equity investment usually meets many or all of the core criteria of strong growth, minority stake, low debt, proven business model, and positive or near-positive profitability. However, it's important to remember that one factor is usually most important — growth.
What are the benefits of growth equity? ›
Growth equity provides various benefits, such as it helps subsidize business operations, has higher growth potential, and restructuring the company's balances.
Does a growth fund pay dividends? ›
The growth option on a mutual fund means that an investor in the fund will not receive any dividends that may be paid out by the stocks in the mutual fund.
How many hours a week is growth equity? ›
Growth equity hours per week
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.
How much do partners at growth equity firms make? ›
At the low end, such as at a brand-new fund with a few hundred million under management, a Partner might earn in the $500K to $1 million range for base salary + year-end bonus. As fund sizes approach several billion under management, Partners move closer to an average of $1-2 million in base salary + bonus.
