Growth Capital – Transformational Financing

Growth capital is a unique type of financing that is intended to have a material and often times transformational impact on a company. Company executives seek out growth capital when pursuing a major expansion, making an acquisition, restructuring operations or for other reasons. Growth capital is typically defined as a minority equity investment or debt financing provided to an established private company in the growth phase of its life cycle, and companies most appropriate for this type of financing are post revenue, ideally EBITDA positive and have a strong track record of consistent growth.

There are a number of types of institutional investors that are potential sources of growth capital, including private equity firms, hedge funds, family offices, sovereign wealth funds, private debt funds and more, but in this article we are going to specifically highlight general characteristics and examples of growth private equity firms.

Growth private equity firms by and large seek annual returns in the 25% to more than 30% range and look to invest $15 million to $75 million per investment. (There are a large number of funds that invest either below or above this range as well.) Some funds have expertise across sectors, while others stick to a select three to five sectors where they have demonstrated success in the past. Common sectors that growth private equity firms will focus on often include healthcare, business services, software, internet, consumer/retail, industrials, energy, and/or media. Some of the leading private equity firms which specialize in growth capital include Summit PartnersTPG GrowthWeston PresidioGeneral Atlantic and Technology Crossover Ventures to name a few. These firms have been investing over decades and each have over $3.0 billion under management. Notably, Summit Partners leads the group in number of exits with over 120 throughout the firm’s history.

Through partnering with private equity firms, companies can accelerate their growth trajectory to achieve a successful exit, perhaps in the form of an outright sale or initial public offering. Private equity firms help think through and orchestrate strategic changes for the company. They actively participate in board level decisions, and in select cases employ the services of seasoned operating executives affiliated with their firm. The presence of strong private equity backing also provides a halo effect on the company and may enhance its reputation, and in turn valuation among prospective buyers.

Still, no partnership should be entered into lightly, and should management decide to pursue growth equity financing from private equity firms, there are a few primary factors to consider. Most notably, does the firm have partners with extensive expertise successfully investing in companies of the same sector? In addition, what is the firm’s reputation among management of prior portfolio companies? Thirdly, is there a good personal fit between the company’s management and board and the partner or partners that will be managing the investment on behalf of the private equity firm? Lastly, is the company comfortable with the level of involvement and influence the private equity firm will have on its strategic direction and key operations?

In summary, growth capital is for business owners and executives with a firm vision to dramatically grow or transform their company, and when pursuing this type of financing, management should weigh the key value a private equity investor can bring to the table while ensuring all parties are in agreement of what a new partnership would mean going forward.

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