William, your research looks at performance from a different perspective, and considers the impact of growth capital investment in particular. Why did you decide to undertake this project?
William Megginson: “Growth equity has historically been an under-explored part of the wider market. There has been very little academic literature focused exclusively on it. Around 10 years ago, Bain and McKinsey retrofitted growth capital segmentation into their data, but there was no real discussion of what we were talking about. Is it late-stage venture capital? Is it early-stage PE? Or is it its own separate category? My goal, therefore, was to find out exactly what growth capital is and what role it can play in investors’ portfolios.”
What did you find?
“The first thing that became apparent was that growth equity is a very large space, representing 20-25% of all PE deals by number. By most estimates, there is more than US$1trn of growth equity AUM today. In terms of definition, meanwhile, in many ways it is the classic European merchant banking model – equity investment in companies with growth potential where the management team is unwilling to cede control. In that respect, it fulfils the same role as an IPO, taking a business to the next stage of growth without requiring anyone to sell out entirely. It helps to create larger and better-capitalised companies – with potentially hundreds of millions, if not billions, in sales – without recourse to public markets.”
The results don’t imply that big funds should necessarily be avoided. A better GP with a larger fund will outperform a bad GP with a small fund. But if an LP faces the same thesis and goes with a larger fund, then there is a trade-off.
Sabrina Howell, Harvard Business School
