In the larger scheme of private equity investing, growth equity generally takes a back seat to buyouts, particularly larger ones, which receive most of the press and generally set the tone for how the industry is covered in the news media. For example, just last year—when the Heinz and Dell deals were being finalized—there were numerous articles about a resurgence of mega-buyouts, but aside from those two $20 billion+ deals, the resurgence never really materialized. Instead, the PE industry has shifted its attention to add-ons and growth equity rounds.
The number of U.S.-based PE growth/expansion deals, according to the PitchBook Platform, has grown from 391 in 2009 to a record-high 583 last year. The first quarter of 2014 saw 135 growth deals, putting 2014 on pace for another big year for growth investments.
We’ve covered the rise of “buy and build” in a previous blog article, and, like add-ons, the increase in PE growth deals has coincided with a shift in how PE firms approach their investments, from traditional leveraged buyouts—which tend to involve risky amounts of debt—to add-ons and growth equity, both of which tend to be sturdier, if less sexy, investments.
PE growth deals have also grown in popularity as buyouts have become highly competitive among both PE firms and corporate acquirers, particularly as valuations continue to rise and fewer desirable platform companies are available to acquire. PE growth deals, in contrast to VC deals, tend to be for companies with growing revenues that have more established brands and market presence than VC-backed startups. In the same vein, companies primed for growth rounds can be fast-growing VC-backed companies like Uber, or more off-the-radar investments, such as Beats, that have “arrived” in their respective markets.
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Several major firms, such as The Carlyle Group and TPG, plan to or have already dedicated resources to identifying companies ready for growth rounds. And recent PE growth/expansion financings, such as Carlyle’s $500 million investment in Beats and TPG’s $475 million deal for a share of Airbnb, show how these mega-firms are willing tomove beyond gigantic acquisitions to buy smaller stakes in growing companies.
For TPG in particular, which has several failed pre-crisis deals still in its portfolio, growth investments mark a safer approach. “We have returned to what private equity does well, after a period of time when the industry did a lot of large deals with mixed results,” James Coulter, co-founder of TPG, was quoted as saying by The New York Times. “We’ve stayed away from consortiums, public-to-privates and some of the things that have been hot in the marketplace.”
While the number of growth investments has risen in recent years, the number of U.S.-based PE growth funds has fluctuated, though the overall trend has been up, according to PitchBook data. Eighteen PE growth/expansion funds closed in 2010, the fewest since 2004, but 40 such funds closed in 2013, collecting more than $9 billion in commitments. But PE growth funds aren’t where most growth capital rounds will be led. This is because firms such as Carlyle and TPG, as well as other traditional buyout shops, have simply been completing growth deals out of their buyout funds, which helps demonstrate the increasingly diversified approach many PE firms have employed since the financial crisis.
PitchBook data show, for instance, that several of the the top U.S.-based investors in worldwide growth deals last year were traditional PE firms, such as Warburg Pincus (which completed nine growth deals in 2013), KKR (eight), H.I.G. Capital (eight) and the Carlyle Group (seven). In addition, we’re seeing new players enter the growth financing market, such as Google Capital, which just announced its inaugural $300 million fund to make investments in web businesses that are further along in their development than traditional venture capital targets.
With diversification on investors’ minds and competition for buyouts only increasing, it makes sense that growth deals have been on the rise, and it’s likely we’ll continue to see growth capital play an important role in the private equity industry for some time.
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