What is the impact of growth capital investment on outcomes?
William Megginson: “We found that growth equity firms target companies that are promising but capital-constrained. They take a minority stake – 30% as a median average – and they exert influence but not control. They will often implement changes to ownership structures. New CEOs are introduced in about a quarter of cases and new directors 70% of the time. The firm typically takes a board seat, providing management expertise and, crucially, injects the capital required for growth in terms of both equity and debt. The result is that these businesses grow much more rapidly than their matched peers, but they do so at a cost, because they are also much more levered.”
That’s surprising, because I think people generally think of growth capital as a no-leverage or at least low-leverage strategy.
“I agree that these findings differ from the common perception of growth equity in the US, where it is often explicitly referred to as a strategy involving little or no debt. However, in the UK at least, which is the dataset we used, it seems that these businesses are levered up fairly substantially – nowhere near as much as buyouts, but significantly more than venture capital. This is both a blessing and a curse. The provision of equity and debt capital enables these companies to grow rapidly, and that means they often achieve a higher valuation on exit. But at the same time, they are also significantly more likely to experience financial distress.”
For those with strong manager selection capabilities, small cap and mid-market players can generate alpha relative to larger funds with lower fees.
Luke Riela, Meketa
