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What is Growth Equity?
Growth equity is a category of investing that exists between venture capital and traditional private equity. Growth equity investors typically look at fast-growing businesses that have a proven core business model, but that may still be relatively early on in their lifecycle.
Although there are no strict rules, many growth equity investors target investment rounds in the Series B to Series D range. Traditional venture capital operates between the Seed to Series B stages, whereas growth equity tends to invest in later rounds. Growth equity firms therefore tend to make larger investments at later stages of the business than venture capital firms.
The advent of fast-growing technology businesses and the emergence of vertical SaaS businesses have helped validate the strategy of growth equity investors.
Some typical characteristics of growth equity investing include:
Investing in fast-growing businesses (e.g., double-digit revenue growth, often underwriting businesses with >20% revenue CAGR)
Investment money is used to fuel the next leg of growth
Taking minority investments instead of seeking controlling stakes (i.e., ownership positions <50%)
Investing in Series B to Series D companies
Investing in companies with proven business models
A shorter time horizon than venture capital businesses (potentially 3-7 years instead of VC's 5-10 years)
Not relying on large amounts of debt to drive returns (which is important in LBO private equity)
The Rule of 40 is a common rule that many SaaS investors adhere to, which stipulates that SaaS investments should adhere to the formula of (Revenue Growth + Profit Margin > 40). SaaS is tremendously popular in growth equity investing and the espousal of this rule highlights how growth equity does indeed focus on growth.
Source: SaaSCFO
It's important to remember that there are many investors that blend the characteristics of different investment strategies. Many private equity firms participate in what would be considered late-stage growth investments (e.g., a Series E minority investment in a fast-growing SaaS business). Investors are ultimately looking for yield and that hunt for yield can take many different forms.
Growth Equity Firms
Below is a list of the world's largest growth equity firms ranked by their most recent fund size. Vintage year refers to the year in which the firms was raised. Note that this fund size figure only pertains to the most recent fund size and does not cover all assets under management.
Below are links to the company's websites. A more complete list of growth equity firms can be found here.
Insight Partners is reported to have raised a $20B flagship fund, which gives it the largest growth equity fund by a landslide. A $20B flagship fund is larger than that of many of the largest private equity funds. TA Associates has the second largest growth equity fund, with an impressive $12.5B.
We observe that there is a fairly steep drop-off in fund size among the largest growth equity players. There are only four firms with a >$5B growth equity fund: Insight, Tiger Global, TA, Summit, and General Atlantic.
We can also notice that many of these growth equity funds are associated with a large-cap private equity firm or mega fund asset manager (e.g., TPG, Blackstone, KKR, Providence). Many asset managers have begun to offer a growth equity product to their investors.
A Typical Growth Equity Investment
To better understand the investment strategy of a growth equity firm, you should look at their investments page and read through their recent press releases.
In particular, it is useful to keep an eye out for:
The kinds of industries they typically invest in,
The logic behind their investment strategies, and
The typical investment size they make.
Here, we can see that General Atlantic participated in a Series C round of a payment infrastructure business. The investment was made to help expand into the European digital payments market. It is also worth quickly searching online to see other investors that participated in the round. Here, Blenheim Capital, Frog Capital, Highland Europe, and Paypal Ventures also participated in the transaction.
Growth Equity Recruiting Tips
Growth equity recruiting borrows some characteristics of private equity recruiting, which may be driven by the asset managers who have both growth equity and private equity practices (e.g., TPG, Blackstone). Growth equity funds tend not to have as prescriptive of a recruiting process as private equity, but many funds do mirror the timing of on-cycle private equity recruiting.
Relative to private equity recruiting, growth equity tends to fill a greater proportion of its positions via the "off-cycle".
If you are trying to prepare for growth equity, you may be disappointed to realize that there are very few pure-play interview resources.
We don't have a dedicated growth equity course, but we would like to relay advice we commonly hear from our growth equity peers:
Excel Modeling: We still recommend knowing how to build an LBO, because a growth equity model is very, very similar to a typical LBO. Growth equity investing is less about using leverage and is more about protecting your investment in the case of downside (like venture capital).
Structuring: The main additional thing you need to learn for growth equity models is structuring. Growth equity investors typically employ less debt and tend to have a bit more focus on preferred securities and options. We have a free primer on preferred security modeling here.
Technology Trends: After modeling, the next most important thing is to follow technology trends. We recommend following a few venture capital blogs so you understand where tech valuations are and what kinds of businesses are trending. We like reading a16z and Tomasz Tunguz at Redpoint.
Investment Pitch: Just like for any other investing interview, there is a high chance you will be asked to pitch a potential investment for their fund. This is where looking at the fund's recent investments comes in handy. You want to pick a company that matches the stage they invest in and the kinds of businesses they like. Although you won't have the same level of detail as a public stock pitch, you can talk more about the business' trends and state of the industry.