The research also highlights superior sales and earnings growth. Overall, how attractive a space do you consider growth capital to be for LPs?
Reji Vettasseri: ““As with the fund size research, I think there may be an issue with causality here. Is it the case that growth equity investors pick the best companies or that financial investors drive superior performance? There is probably an element of both. Growth capital investors are good at picking off the best bits of the market, certainly, but I also definitely see growth investors adding value that goes beyond capital. These tend to be businesses that are less mature than their buyout counterparts. Management teams need capital, but they also need support to help get them ready for their next stage of growth.”
William Megginson: “To answer the question of whether growth equity investment really improves performance or if it is simply a means of identifying the most promising companies, we used a difference-in-difference model. The idea is that you match firms that are backed by growth equity with other firms of a similar size in the same industries before the investment took place. It is then possible to track the matched businesses, identifying the impact of the growth capital investment versus what would otherwise have been the case.”
Luke Riela: “We view growth capital in two distinct ways. It can refer to late-stage venture, where a high-growth firm is on a growth trajectory to achieve an IPO or sale in a relatively short period of time. But it can also refer to slightly slower-growing companies, that have been around for a bit longer, but where the management team is not willing to hand over the keys. Those are two very different types of investments, and we tend to find the latter more compelling.
“Growth equity in terms of late-stage VC can theoretically deliver higher returns than buyouts, with lower loss ratios and a quicker return of capital than venture. It acts as a nice in-between spot in a portfolio, particularly when exit markets are strong. However, when exit markets are challenged, as they have been for the past few years, a lot of growth equity players have struggled with achieving the timelines and valuations that they had been expecting. It is a pretty cyclical space.”
