Allen Wagner April 22, 2014
What is a growth equity investment?
A growth equity investment provides relatively mature companies with capital to fund expansion or restructuring in exchange for an equity position, typically a minority stake. As opposed to a buyout, growth equity investors do not take control of the business. In exchange for a minority stake, most investors gain seats on the company’s board and advise the portfolio company on matters of finance, growth and product.
What’s the difference between a growth equity deal and a venture capital deal?
While both growth deals and VC deals involve an investor taking a minority stake in a company, venture capital-backed startups tend to be in their earliest stages, without proven business models. Companies that receive growth investments usually already have strong revenues, operate with proven business models and tend to have stronger brand recognition.
What’s the difference between a growth equity deal and a buyout?
While both growth deals and buyouts usually involve private equity investors, buyouts are transactions in which a PE firm acquires a controlling stake (more than 50%) in a target company. Buyouts typically involve some combination of cash and debt, hence the term “leveraged buyout.” In contrast, PE firms doing growth deals acquire less than 50% of a target company and use little to no debt to do so.
Why would a company receive growth financing and not a VC round or buyout?
More often than not, companies that receive growth equity are usually too small for a buyout or not growing fast enough for a VC firm. VC firms seek out early stage companies with rapid growth or expected growth, while buyout shops typically look for highly profitable companies with consistent free cash flow. Companies that are candidates for growth equity tend not to fit either mold. As mentioned above, growth equity targets have proven business models and are more mature than most targets for VC financing. They also don’t exhibit the rapid growth tendencies that many VC-backed startups have. On the flip side, they tend not to have the profitability and free cash flow that buyout targets do.
Featured image courtesy of Wikimedia Commons user Hu Toya.