Growth equity has emerged as one of the fastest-growing segments of the private equity industry. In fact, over the past decade, growth equity has grown twice as fast as buyout funding, accounting for 82% of the traditional buyout total when combined with late-stage VC funding.
Growth equity investing is an investment strategy that lies at the intersection of VC and PE, offering the best of both segments with respect to the risk-return spectrum. As a result, it has emerged as a highly attractive investment strategy for limited partners seeking to balance risk and return while enjoying significant growth potential.
In this blog, we'll dive into how growth equity works, showcase examples of successful growth equity investments, and explore essential tools that growth equity managers can use to evaluate investments and effectively manage portfolios.
What is growth equity?
Growth equity is a type of private equity investment that focuses on investing in established businesses poised for rapid growth. Unlike VC, which typically invests in startups and early-stage companies, growth equity firms invest in businesses that have already demonstrated some level of success and are looking to expand their operations.
Growth equity firms invest in the non-publicly traded securities of established companies that have demonstrated successful revenue streams and are profitable or close to profitability. These firms provide capital to support growth initiatives like expanding into new markets, developing new products, or undergoing financial restructuring. These growth initiatives often lay the groundwork for an eventual merger, acquisition, or initial public offering (IPO).
One of the defining features of growth equity investments is that they typically involve taking a minority stake in the company. While traditional PE firms often take a controlling position in a business or replace parts of the management team, growth equity firms collaborate with the existing management team to help the company achieve its growth goals.
This table from WallStreetPrep shows the difference between growth equity, VC, and leveraged buyouts.
A growth equity investment can be highly beneficial for both the firm and the company it is invested in.
Some benefits of growth equity investments are:
- Attractive returns: Growth equity investments offer attractive returns with less risk than early-stage VC investments.
- Capital and strategic support: This investment strategy provides established businesses and entrepreneurs with access to capital and strategic support to achieve their growth objectives while maintaining control over their business.
- No debt: Growth equity deals typically do not use debt, which can help reduce the risk of default and allow companies to focus on expanding their operations.
- Smaller investment: Growth equity often requires a smaller equity investment compared to a buyout of a similar-sized company, making it a more affordable option for companies seeking to fund their growth ambitions.
How does growth equity investment work?
Growth equity investments provide growth-stage companies with the capital they need to sustain or accelerate their growth plans while also establishing defensible market positions. This type of investment can be highly lucrative for investors, but it requires a thorough analysis and careful due diligence to ensure that the investment aligns with the investor's objectives and risk tolerance.
Here is a step-by-step process of how growth equity investments work:
1. Deal sourcing and selection
Identifying potential investment opportunities is the crucial first step in the growth equity investment process. Growth equity firms typically source investment opportunities through various channels, like networking with industry contacts, attending conferences, employing deal sourcing tools, and reviewing investment proposals submitted by businesses seeking capital.
These firms typically invest in companies with proven business models that need capital to fund a specific expansion strategy, as outlined in their business plan.
2. Due diligence
Once a potential investment opportunity has been selected, due diligence occurs. Due diligence is performed by reviewing the company's financials, business model, market opportunity, competitive landscape, and management team.
Companies that accept growth equity investments should have enough funding or cash flow to finance their expansion strategy. If a company needs capital to survive, the rate at which they burn through cash may signal that there is no market demand or that management is misallocating funds. Companies that do not require the growth capital to continue operating are ideal targets, and the decision to accept the investment is discretionary.
3. Negotiation and structuring
After completing due diligence the next step is negotiating the investment's terms and structure the deal. This involves determining the amount of capital to be invested, the percentage of ownership the investor will receive, and any other terms and conditions of the investment.
The terms of the investment may include provisions like liquidation preferences, anti-dilution clauses, board representation, and rights to future financing rounds. Once the terms have been agreed upon and the investor becomes a shareholder, the investment is made..
4. Investment and monitoring
As soon as the growth equity firm becomes a shareholder, it works closely with the company's management team to monitor the business's progress. The investor's involvement may include providing guidance and strategic advice, introducing potential customers or partners, and assisting with other business development initiatives.
This is often an active role for growth equity investors. Their experience and expertise makes them a critical asset for the companies they invest in, and may even help them succeed. They may also provide additional capital in future funding rounds to support the company's growth as needed.
5. Exit strategy
The final step in the growth equity investment process is to exit the investment. There are various ways to exit the investment, like:
- Selling the company shares to another investor or strategic buyer
- Conducting an initial public offering (IPO)
- Arranging a management buyout
The ultimate goal of the exit is to provide a positive return on the investment to the investor while also allowing the company to continue its growth trajectory under new ownership or as a public company.
Examples of growth equity investments
Over the years, the growth equity market has seen explosive growth as investors sought out high-growth companies with strong potential for profitability. Research from Cambridge Associates states that from 2008 through 2017, growth equity companies generated an average annual revenue growth rate of 17.2%, more than triple that of public companies.
The following are some examples of businesses that have secured significant growth equity investments and how this investment has impacted their growth trajectory.
Example 1: Silver Lake's investment in Alibaba
Silver Lake's investment in Alibaba, the Chinese goods marketplace, is widely regarded as one of the most successful growth equity investments ever. Alibaba had already established significant traction and was proliferating with an attractive marketplace business model when Silver Lake made its move in 2011.
Over two rounds of investment in 2011 and 2012, Silver Lake invested $500 million for a minority ownership stake in Alibaba, valuing the company at over $10 billion. This provided Alibaba with the much-needed capital to fuel its growth, and Silver Lake reaped the rewards in 2014 when Alibaba went public. Silver Lake's minority stake was valued at more than $5.1 billion, achieving a remarkable return of more than 10 times their original investment and a net gain of $4.5 billion.
Example 2: General Atlantic's investment in Adyen
Adyen, a Europe-based online payment platform, began as a bootstrapped venture by its partners. In December 2014, Adyen secured $250M in Series B funding led by General Atlantic, which valued the company at $1.5B. This round of funding played a significant role in driving Adyen's growth trajectory.
Fast forward to June 2018, and Adyen went public on Euronext with an implied market capitalization of €7.1B based on the current capital structure and previously issued private shares. General Atlantic's $250M stake was worth $1.4 billion—an impressive return of 5.5 times their initial investment or a ~53% IRR.
Furthermore, the company's revenue skyrocketed. In 2022, they reporting €721.7 million in revenue, a staggering 30% YoY growth compared to €556.5 million.
Example 3: Edison Partner's investment in YieldStreet
Yieldstreet, a US-based digital wealth management platform, planned to increase access to private market investment products. In 2019, Edison Partners, a prominent growth equity investment firm, recognized the immense growth potential of Yieldstreet and invested $62 million in the company. The investment helped Yieldstreet to expand its investor access, introduce new investment offerings, and enhance investor education and engagement.
Over the next two years, Yieldstreet's client base grew from roughly 100,000 to 300,000 members, and its revenue surged to $100 million in 2021. In the same year, Yieldstreet raised a $100 million series C funding round, which included investment from Edison Partners and other top-tier investment firms such as Tarsadia Investments and Gaingels.
How do growth equity managers add value?
Growth equity managers play a vital role in helping companies realize their potential by providing the necessary funding and support for growth and expansion. The ultimate objective of growth equity managers is to maximize the potential of their portfolio companies through the provision of capital, strategic guidance, and operational expertise.
The following are some ways growth equity managers add value to portfolio companies:
- Providing capital: Growth equity managers invest capital in their portfolio companies to help them grow faster. This capital can be used to fund new product development, expand the sales team, or invest in marketing campaigns, among other things.
- Strategic guidance: They work closely with the company's leadership to help them develop and execute a strategic growth plan. This may involve helping them enter new markets, identifying potential acquisition targets, or optimizing their product offering.
- Revenue growth: Through the optimization of sales efforts, scaling up of production, and identification of growth opportunities in new geographies or product lines, managers can significantly contribute to their portfolio company’s success. Additionally, their vast network can accelerate the growth of their portfolio companies through introducing them to valuable business partners and clients.
- Exit planning: Growth equity managers play a critical advisory role in guiding companies toward potential exit strategies, such as an IPO, strategic sale, or buyback. By tapping into their extensive industry experience and market knowledge, growth equity managers can assist portfolio companies in evaluating the various exit options and identifying the most appropriate course of action.
5 Tools for growth equity managers
As growth equity markets continue to grow, managers face increased competition and pressure to make the right investments. To stay ahead of the curve, growth equity managers must harness suitable tools to optimize their workflow and enhance their performance.
While technology cannot make all of your vital investment decisions for you, adding the right tools to a tech stack can empower decision-makers to steer their firms toward the most profitable opportunities.
Here are the top five tools that every growth equity manager should adopt to streamline their most critical workflows.
Affinity is a cutting-edge CRM platform specifically designed to meet the needs of deal-driven growth equity firms. It helps automate data entry, manage relationship networks, and track deal flow pipelines, making it an essential tool for any investment team.
With AI-driven relationship intelligence, Affinity offers a deeper understanding of the firm's network, enabling them to source new relationships and deals more effectively.
- Automated data entry: Captures and enters data from your email, calendar, and other deal critical workflows automatically, ensuring accurate data entry and saving 200+ hours of manual data entry and updates per year.
- AI-driven relationship insights: Evaluate the strength of relationships and analyze past interactions using AI to identify potential introductions that could pave the way for quicker deal closure.
- Seamless deal flow management: Provides a clear and intuitive view of the deal pipeline, allowing managers to easily track the progress of deals, identify potential roadblocks, and collaborate with team members to move deals forward.
- The platform is designed with a clean UX/UI that is easy to navigate and use.
- Simplifies deal management with automatic interaction capture, one-click updates, and easy sharing of team-level data.
- The platform captures relationship insights automatically, making it easier for firms to manage their network directly in their CRM.
- Advanced analytics capabilities only available on the premium version of the platform.
Request a demo to gain more insights into the pricing and additional features.
DealCloud offers an enhanced CRM system fueled by data that caters to the specific needs of growth equity firms. This solution empowers growth equity managers to execute deals at the highest levels, regardless of their firm size or investment mandate. With DealCloud's customizable software, aligning current business development and portfolio management processes becomes effortless.
DealCloud Growth Equity Page
- Streamlined pipeline management: Improves the efficiency and effectiveness of firms in all stages of their pipeline, from origination to execution.
- Robust CRM: Its industry-specific platform enables growth equity professionals to transform day-to-day activities into actionable relationship intelligence.
- Accelerate conflict resolution: Through a unified platform that manages deals, relationships, and compliance, it enables lenders and credit advisors to accelerate conflict resolution.
- Highly customizable software tailored to fit the needs of growth equity managers, regardless of firm size or investment mandate complexity.
- Unified platform to manage data from proprietary and third-party sources, allowing for easy data transformation into institutional knowledge, leading to better investment decisions.
- Manual data entry is required for all analytics.
- Onboarding and customization can take up to six months.
The pricing information is not publicly available on their website. However, you can request a demo to learn more.
Carta is an ownership and equity management platform that assists growth equity fund managers in streamlining their portfolio and back-office management processes.
This platform offers a panoramic view of a firm's investments, encompassing equity ownership, capitalization tables, and valuations. Additionally, the mobile app provided by Carta enables portfolio management on the go, ensuring managers can oversee their portfolios efficiently and effectively.
Carta Home Page
- More efficient fund administration system: Full-service fund administration services with access to portfolio company cap tables and real-time fund metrics, all in one place for more efficient fund administration.
- Streamlined portfolio management: Efficiently manage the portfolio with Portfolio Insights, collecting cap tables and critical data from all portfolio companies and quickly modeling exit scenarios.
- Manage your back office in one place: Enhance back office management with audit-ready valuations and defensible calculations, producing valuations quickly and accurately to save time and increase efficiency.
- A robust platform that enables real-time monitoring of assets and cash flow.
- Enables teams to conveniently evaluate all investments in one place.
- New users may initially find the platform challenging to navigate and may require training.
Carta offers three pricing tiers: Launch, Paid, and CartaX. These pricings are based on stakeholder count, cap table complexity, and plan. Request a demo to gain a more detailed understanding of each plan and its corresponding pricing.
PitchBook offers a dynamic database of over 3.5 million companies, providing growth equity managers with the necessary tools to source deals effectively. By automating the time-consuming task of manually searching for private company data, fund managers, analysts, and researchers can focus on allocating funds and monitoring their portfolio companies performance.
Furthermore, the platform allows growth equity managers to develop exit strategies based on successful exits of comparable companies, increasing the chances of a successful exit.
PitchBook Home Page
- Enhanced research and insights: Find investment or partnership opportunities that align with the firm's strategic goals using financial and non-financial metrics like valuations, revenue, employee count, web traffic, and social followers.
- Multi-benchmark comparison: Quickly compare and customize benchmark data with ease, thanks to their robust methodology and timely fund returns that bring accurate data to the forefront.
- Customized opportunity identification: Search for investment or acquisition targets based on the most relevant attributes, including pre and post-money valuations, industry, total capital raised, revenue figures, and other important non-financial metrics.
- Offers an incredibly precise and comprehensive database of startups and companies spanning almost every industry vertical.
- Get institutional-grade private market research that delivers expert analysis.
- The analysis is built on an investor-first approach to ensure you get the insights you need to make informed decisions.
- Relatively expensive compared to other options, making it not cost effective for small firms.
PitchBook's pricing information is not readily available on its website, but you can request a demo or a free trial to learn more.
By automatically filtering through relevant data, 4Degrees CRM simplifies the process of finding the ideal connections for companies or growth equity investors. The platform also includes automated deal data entry and auto-generated reports for added convenience. Growth equity managers can also tailor their deal flow pipeline to align with their unique deal-making processes and workflows.
4Degrees Home Page
- AI-driven relationship management: Sync email and calendar to see all interactions with relationships in one place.
- Real-time intelligent recommendations: Get alerts on new opportunities and key connections with global intelligence mined from the web.
- Easy-to-use pipeline management: Easily customize the dashboard, track deals, build custom reports, and access essential metrics.
- Efficiently sync email, calendar, and third-party sources to populate deal and contact records, saving hundreds of manual hours.
- Generate reports that track business development analytics, sourcing data, and portfolio KPIs with ease.
- Track progress and manage the pipeline from sourcing to completion in one view, with the ability to know the status of every deal with just one click.
- Minimal AI insights, which may limit the depth of insights..
- Lacks a lot of native integrations, which may limit the ability to utilize and integrate the collected data fully.
4Degrees employs a per-user per-month pricing model, but the exact cost varies based on factors unique to your organization and team. To obtain the most accurate pricing information, you must contact them.
Streamline your growth equity management with Affinity
Growth equity is a dynamic investment strategy aimed at achieving vigorous growth and overcoming the barriers associated with traditional equity investments.
However, as the growth equity market expands and competition intensifies, it is crucial for growth equity investors to remain at the forefront by leveraging the latest technology and resources available.
One such tool is Affinity, which enables growth equity investors to optimize their workflow, gain valuable insights into potential investment opportunities, and make informed decisions that lead to growth and success. With its advanced features and robust capabilities, Affinity is the perfect tool to take your growth equity game to the next level.
Ready to elevate your growth equity management to the next level? Schedule a demo with Affinity today and discover what it can do for you.