Key Takeaways
• Growth equity represents investment opportunities in relatively established companies that are undergoing an evolutionary lifecycle event with prospects for significant growth.
• Compared to venture capital, there is less risk with growth equity investments, as targeted companies usually function in established markets.
• Growth equity investors usually favor companies with positive growth trends of 30% or higher and have little to no debt.
A unique segment of private equity (PE), growth equity helps drive established, private companies’ growth. This distinguishes it from traditional PE and venture capital approaches. Understanding aspects of the segment can help with investment decisions.
With that said, here is growth equity explained for investors in real estate.
What is Growth Equity?
Growth equity represents investment opportunities in established companies that are undergoing an evolutionary lifecycle event with prospects for significant growth. It is commonly part of real estate investment strategies.
Companies use growth capital to expand operations, enter new markets, and buy other businesses to increase revenues and profits. In exchange for acquiring minority ownership stakes in late-stage companies, investors gain from the high-growth potential and moderate investment risk.
The profiles of growth-equity investors typically include late-stage venture capitalists (VC), hedge or mutual funds, and PE firms.
Growth equity investors usually favor companies with positive growth trends of 30% or higher and have little to no debt. Such companies also are often owned or managed by their founders and are commonly tech-related.
History
The term “growth equity” once largely referred to private investment rounds that provide companies with expansion capital. Summit Partners, TA Associates, and General Atlantic are a few of the top growth equity pioneers.
Since then, the growth equity space has come to encompass a broader range of investment activity. Relatively new participants include many of the top venture firms, which now have growth funds. To participate in growth investments, later-stage investment firms such as PE and hedge funds have also raised growth funds.
How Does Growth Equity Investing Work?
Growth equity usually provides expansion capital for companies with positive growth trends, proven business models, and that need more capital. Growth capital is often structured as preferred equity.
These companies usually have a solid customer base, viable business model, and are growing rapidly. In turn, growth equity managers add value in terms of revenue growth, enhanced management, margin improvements, and exit planning. These can all be part of real estate investment strategies as well.
Types of Private Equity Investment Strategies
There are a number of different PE investment strategy types, including:
- Leveraged buyouts. This is when a company acquires another one using a large amount of borrowed capital. PE firms frequently use LBOs to purchase and later sell companies at a profit. Successful examples include Hilton Hotels, Safeway, and Gibson Greeting Cards.
- Distressed investments. Investors here can generate large returns through short-term price recoveries or so-called loan-to-own approaches. With the latter, debt converts into equity. Commonly, distressed debt securities include common and preferred shares, bonds, bank debt, and trade claims.
- Venture capital. With this form of PE, VC investors provide financing to startup companies and small businesses thought to possess long-term growth potential. VC has financed well-known companies including Microsoft, Apple, and Hewlett-Packard.
- Secondary investments. This market refers to the purchase and sale of pre-existing investor commitments to PE and other alternative investment funds. For example, a bank writes a mortgage loan, creating a mortgage security. The bank subsequently sells the security on the secondary market to Fannie Mae.
Leveraged Buyout vs Growth Equity
While both have similar return expectations, there are differences. Generally, leveraged buyouts involve using equity and debt to acquire mature, cash-generating companies. Meanwhile, growth equity targets established companies with high growth potential and a history of revenue generation. They both have similar risk profiles.
Growth Equity vs Venture Capital
The two investment types have distinct differences, whether as part of real estate investment strategies, or other projects:
- Holding period. On average, the holding period for growth-equity investments is three to seven years. That is compared to five to 10 years in venture capital. It takes more time for new companies to realize their potential.
- Source of Returns. For VC investments, the main source of return is the profits from newly introduced goods or services. With venture capital, though, the primary source is the company’s ability to profitably scale operations.
- Risk profile. There is less risk with growth-equity investments, as targeted companies usually function in established markets with commercially viable goods. In VC, there is mainly market and product risk.
Overall, growth equity targets companies that have stable business models and a track record of revenue generation. Such history may include real estate investment strategies. By contrast, venture capital focuses on early-stage startup companies with high growth prospects but greater risk.
How to Get Started
Growth capital exists at the nexus of venture capital and private equity, which means that growth capital comes from a variety of sources.
The alternative investment platform Yieldstreet, which generates secondary income streams through accessible investments, has private-market opportunities in both segments. Increasingly, investors are turning to private markets, and asset classes such as real estate and art. Through them, they can skirt the constant volatility of public markets and, for example, participate in real estate investment strategies.
Yieldstreet’s offers highly curated opportunities in private equity investment with low minimums and early liquidation options. The platform, on which $4 billion has been invested to as of 3/31/24, also features a venture capital program. Retail investors can take positions in private businesses that are either shaking up existing sectors or creating new ones altogether.
In addition to the potential for high returns, participation in the private market also has another key benefit: portfolio diversification. Building an investment portfolio that includes a mix of asset types can potentially improve returns and shield against inflation. It can also reduce overall portfolio risk, which we believe is essential to long-term investing success.
