The Hybrid of Private Equity & Venture Capital?
Growth equity is a segment of the private equity industry, investing in established companies in the growth stage. Growth equity funds look for minimal risks, downside protection and promising profitability. In this article, we will lead you through the basics of growth equity, how it is different from other types of investment, and how you can land yourself a position in this field.
What is growth equity?
Growth equity is a segment of the private equity industry which aims to invest in minority stakes of established, mature companies undergoing specific expansion plans like entering new markets, expanding or restructuring. Growth equity is also sometimes referred to as growth capital or expansion capital. Their portfolio companies are usually in the growth stage and are not able to go public nor raise debts.
How does growth equity work?
What is growth equity strategy?
The growth equity strategy is a private investment that falls between venture capital and leveraged buyouts (LBOs). Growth equity’s distinct risk-return profile, which is driven by a focus on quick operational improvements and revenue growth, minimal leverage, and downside protection, has resulted in dedicated allocations across many portfolios, making it an attractive landing in today’s investment environment.
Growth equity target profile
Just like how the strategy is laid out, growth equity investors often turn their attention to companies that are in the middle ground between venture capital’s and LBOs’ portfolios. While VC focuses on early-stage firms with little historical financials and LBOs look for mature companies with an extensive history of revenue growth, growth equity funds often show fascination in well-operated companies with effective business models (owning well-known products/ services/ technology, as well as having a loyal customer base), which reduces the risks of technology adoption associated with VC investments. These companies often have an impressive track record of cash generation, with their revenue scale ranging from $3M – $50M per year.
While the differences between growth equity, private equity, and venture capital will be further elaborated in the following parts of the article, it is clear that growth equity investments are often underwritten based on defined and quantifiable foundations like profitability milestones, not just on speculative assumptions.
While growth equity companies might already be generating net cash inflows or are projected to achieve some profitability in the near future, they often expect to grow even faster and bigger. However, the revenue is typically not enough to afford large debts.
Besides, growth equity managers often target private markets and industries that are anticipated to have accelerated growth compared to the overall economy – for example, healthcare, technology, and financial services. A firm that is experiencing much faster growth than its industry rivals shall also be an appealing target investment.
Growth equity return profile
The two concepts of risk and return are intimately connected. Growth equity investment aims to keep risks to the minimum while generating similar returns to venture capital. Generally, the target internal rate of return for growth equity is 30 to 40% in the holding period of 3 to 7 years. Returns are most likely to come from revenue growth, profitability and strategic value, and the risk of capital loss is lower than VC’s but higher than LBO’s. The growth equity’s return profile will be further illustrated when being compared in the following parts.
Growth equity risk characteristics
Execution and management risks are the two most significant types of risk faced by growth equity investors. Growth equity generally has a low risk profile, which can be minimized even further by the value creation and team development tools used by growth equity investors to assist their firms.
While management risk is technically inescapable in any type of investment, growth equity overall has a higher degree of management risk because businesses in the development stage are always going through phases of rapid expansion, requiring the addition of new corporate departments and management members. Building a skilful and well-functioning team is a crucial task for growth stage firms, and that’s why growth equity investors are focused on it.
Other than that, growth equity funds do not really have to deal with default risk, market risk or product risk because portfolio firms do not encounter great amounts of debt and have already developed products or technologies which have a stance in the market.
Growth Equity vs. Private Equity vs. Venture Capital
“The main difference between private equity, growth equity and venture capital is the stages in the life-cycle of companies invested. VC most often invests in early-stage companies with minimal financial history. PEs look for firms that are financially mature. GE is often described as the intersection between PEs and VCs, investing in established companies not yet gaining success financially but expecting near-term profitability.”
The table below will identify the essential distinctions between growth equity, PE and VC:
| Private Equity | Growth Equity | Venture Capital | |
|---|---|---|---|
| Industry focus | Invest in a diverse portfolio across industries | Able to invest in a diverse portfolio across industries. However, growth equity currently skews toward technology and TMT (Telecom – Media – Technology) | Focus on some certain industries, namely information technology (mostly in the software sector), biotech, cleantech or fintech |
| Source of investment | Use both equity and debt to invest (LBO) | Use equity to invest | Use equity to invest |
| Holding period | 2 – 5 years | 3 – 7 years | 5 – 10 years |
| Return expectations | Expect that all of investments have positive returns | Expect that all of investments have positive returns | If only 1 or 2 companies among VC’s portfolio can successfully go public or be acquired, VC can achieve its expected returns |
| Target Internal Rate of Return (IRR) | 25 – 35% | 30 – 40% | 35 – 50% |
| Target Money-on-money multiple (MoM multiple) | 2 – 5x | 3 – 7x | 5 – 10x |
| Due Diligence | The most complex and expensive among PE, growth equity and VC due to involving multiple 3rd parties specialists, such as lawyers, management consultants or auditors | As the fund mostly takes minority stakes, the complexity is not as much as the PE’s one | Simple, even sometimes the investment is made just because the firm believes in the founders’ ideas |
| Stage of investment | Growing and mature startups | Growing and mature startups | Early-stage startups |
| EBITDA of investees | EBITDA > 0 | EBITDA may or may not be positive, depending on how much profit is reinvested in new customer acquisition | EBITDA <=0 |
| Control Extent | PEs do control investing and gain controlling interest (the act of holding a majority of a company’s voting stock) in their portfolios | Growth equity can do both minor investing and control investing, depending on investing capital | VCs do minor investing, in which the firm owns a small percentage of stake and will not involve much in the decision making process. VCs’ main objective is to grow a startup |
| Portfolio Management | Have operating partners to work directly with portfolio companies to improve operations, drive profitability and grow initiatives | Support portfolio companies on the specific expansion plan. | Support to hire talents and build team |
| Recruitment Process | Private Equity | Growth Equity | Venture Capital |
|---|---|---|---|
| Process & Timeline | Highly-structured process and clear timeline | Growth equity division of mega funds and some big funds recruit during On-cycle | Recruitment is a need-based process; hence, there is no standard process and timeline |
| Compensation (salary, bonus and carry) |
Higher than that of VC due to bigger fund sizes | Similar to traditional PE funds | Lower than that of PE due to smaller fund size and the number of investments |
| Preferred background | Skew towards former investment bankers | Skew towards former investment bankers but there are chances for candidates with consulting or product management background | Diverse background: consultants, entrepreneurs, etc, can get into VC if they have relevant experience, for example: knowledge about the industry the firm focuses on |
| Traits of a candidate | High requirement of financial modeling and technical analysis | Financial modeling and technical knowledge is a must but not as heavy as traditional PE firms | Startup lovers Financial modeling is still a must but not as heavy as PE’s requirement Networking/ Interpersonal Skill is preferred as there are more qualitative work in VCs |
Top growth equity firms
TA Associates
TA Associates, founded in 1968, is a renowned worldwide growth private equity firm. TA mainly focuses on successful, expanding businesses in five key areas – technology, healthcare, financial services, consumer and business services. Across North America, Europe, and Asia, the firm’s worldwide team of more than 100 investment experts looks for firms with high-quality business models and potential for long-term growth.
TA works with the owners and management teams of its portfolio businesses as an active investor, utilizing its knowledge, extensive network of global resources, and value-add capabilities.
Summit Partners
Summit Partners is a worldwide alternative investment business that manages over $23 billion in money committed to growth equity, fixed income, and public equity opportunities. Summit was an early industry pioneer, helping to develop the growth equity category and investing in over 500 businesses in a variety of areas, including technology, healthcare, e-commerce, consumer, financial services, and others. Summit’s extensive expertise and dedication to innovation enable the firm’s partners and clients to benefit from a growth-oriented approach.
General Atlantic
General Atlantic is a worldwide growth equity firm focusing on working with businesses driving technological innovation in its five key investing sectors: consumer, financial services, healthcare, life sciences, and technology. Over 40 years ago, the company pioneered the growth equity asset class, and it now works with entrepreneurs to help them turn their ideas into reality with the help of its patient capital, operational experience, and worldwide network.
With more than 175 investment experts headquartered in New York, Amsterdam, Beijing, Greenwich, Hong Kong, Jakarta, London, Mexico City, Mumbai, Munich, Palo Alto, and So Paulo, General Atlantic now manages $40 billion in assets.
Other top names in the growth equity industry include:
- TPG Growth
- TCV
- Turn/River Capital
- FTV Capital
- Silversmith Capital Partners
- Spectrum Equity
- Volition Capital
Growth equity career paths
Working as an analyst in growth equity means that you will have to go through daily tasks of:
- Sourcing
- Market research
- Deal work
- Portfolio company work
- Financial modeling
The nature of a growth equity analyst’s work is quite similar to that of an analyst or associate from a private equity fund. However, there are several differences you should consider if you are contemplating a career in growth equity:
Growth equity salaries and compensation
The pay of growth equity staff is similar to that of private equity. On average, the total salary plus bonus for a growth equity analyst is somewhere around $120K a year. An associate typically earns from $170K to $270K. A fund principal might make $600K while that amount of a managing director can reach more than $1,000K per year.
The total number of compensation depends on regions and the type of fund you’re working in. For instance, mega funds can pay you double for the same hours worked. Below is a table illustrating the annual pay of private equity employees in North America for your reference.
| North America | Average | High | ||||
|---|---|---|---|---|---|---|
| Salary | Bonus | Total | Salary | Bonus | Total | |
| Associate/Senior | $118K | $116K | $234K | $260K | $275K | $420K |
| Vice President | $182K | $210K | $392K | $350K | $700K | $925K |
| Principal | $273K | $335K | $608K | $1100K | $700K | $1750K |
| Managing Director/Partner | $473K | $614K | $1087K | $2000K | $2100K | $2650K |
Source: Heidrick & Struggles 2019 survey
Typical roadmap to growth equity
Getting into growth equity is basically the same as getting into private equity. We suggest the following paths below so you can learn more about the recruiting process:
From investment banking to growth equity
Exiting from investment banking is the most common track to enter growth equity. Growth equity firms often have two recruitment periods:
- On-cycle recruitment is organized by mega funds to target bulge brackets/elite boutique banks Analysts. It often happens from August to October every year, within a few months of IB Analysts’ start date. However, each firm’s process, from submitting a resume to receiving offers, lasts only 1 to 1.5 months.
- Off-cycle recruitment is organized by middle funds and will be kicked off after the on-cycle one. The off-cycle season often runs from December to February and each firm’s process is also longer than that of on-cycle recruitment. Growth equity firms can also recruit other vacancies during off-cycle and those are need-based positions.
From growth equity internship to analyst
Recently, this track has become more popular with some mega funds recruiting fresh graduates for Analyst positions. These tier 1 summer analyst internships at mega funds are limited and very competitive. Similar to bulge bracket internship applications, you need to be a “superstar” with a stand-out resume, relevant experience, ideally at boutique investment banks & small private equity funds, and super-smart networking to get into those limited internship interview slots.
We put down the approximate timeline of all Summer Analyst programs, Full Time Analyst programs in the “Recruiting process” so that you can plan ahead your career.
Growth equity recruitment process
There are 2 types of recruiting processes: The on-cycle process and off-cycle process, the same as private equity. The timeline of the two processes are laid out below, from networking to on-board period:
On-cycle recruitment process
Target
The on-cycle process mostly targets Analysts at bulge bracket and elite boutique banks for associate positions at mega-funds and upper middle funds. However, as the industry keeps growing, growth equity firms now also organize on-cycle recruitment for Summer Analyst Program (i.e: internship) and Full-time Analyst Program.
Process
For Associate positions, the process can start as early as July to October, only a couple of months after Analysts at bulge bracket and elite boutique banks start their jobs. If you finish the process and get the job offer, you can only start in the next 1.5 – 2 years. For example, if you get the offer in 2021, you will only start your PE career in 2023.
The headhunters have more power in the Associate on-cycle recruitment process compared to off-cycle. After receiving the CVs, the headhunters will contact the candidates and set up a telephone interview. Some common questions in this interview could be: “Walk me through your resume?”, “Why growth equity?”, “Why this firm?”, etc. If you can impress the headhunter, they will pass your CV to the firms.
The growth equity firm will invite you to “a weekend event”, in which the scariest part of on-cycle recruitment happens. You will have four to five 30-minute interview sessions with people across levels in that firm. If you pass, the firms will call you for an LBO model test. Finally, you will have the result on Monday.
For Interns and Analysts positions, the timeline can be found above. However, always double check with your target firms because Interns and Analysts are not growth equity firms’ recruiting priority and the process can vary year by year. Interview process is not as exhausting as that of Associate and interview questions skew towards fit questions more than deal experience and case studies.
Off-cycle recruitment process
The off-cycle process is applied for situations below:
- Middle funds recruiting Associate positions,
- Positions in non-US markets,
- Positions for non-experience in Investment Banks
Among those 3, Middle firm recruitment is the most common case. Therefore, we will focus on the process of (1). The requirement, timeline and process of (2) and (3) will depend on which exact position the firm is recruiting.
The process of recruiting will start after the on-cycle process, from December to February. Successful candidates in this track will start 1.5 – 2 years later, the same timeline as on-cycle successful candidates. However, if you apply for any vacancy that firms need immediately, you can start instantly. Those recruitment timelines are more random throughout the year.
The off-cycle recruiting process usually lasts longer, in which recruiters want to assess your “fit” and critical thinking abilities on deeper levels and they also require more thought and preparation of a real investment thesis. Headhunters have little power here but you can still try to reach out to them and check if there is any vacancy.
A summary table of the two recruitment processes is presented below for a quick review.
| On-cycle recruitment process | Off-cycle recruitment process | |
|---|---|---|
| Recruiters | Mega funds and upper middle market funds | Mostly lower middle market funds. mega funds and upper middle market funds still can recruit if there are available slots |
| Target Candidates | Analysts in bulge bracket and elite boutique banks | Analysts at smaller firms/banks People who do not work in banks Roles not in the NYC |
| When? | The process will start in August or September | The process will start around December or January |
| Timespan | Days to weeks Starts and ends very quickly |
Usually months |
| Interview | A paper LBO or a two-three hour LBO is more common in On-cycle recruitment. | Focuses on the in-depth thought process; therefore, taking-home LBO model and presentation is often applied |
How to get into growth equity
The process of making your way into growth equity can be simplified into two steps: perfecting your resume and excelling at the interview. Below are some of our tips that candidates shall find incredibly helpful for the application process.
Step 1: Prepare resume & cover letter
Before writing your resume, think carefully about what will make your resume deal-oriented. Therefore, we recommend following the two steps to have your CV heading in the right direction.
- Take a look at the current job description of Analyst/Associate/Senior Associate and pick the keyword when your target firm describes that position.
- Select your achievements/involvements.
There are some ground rules that you should follow here:
- You should choose 2-4 achievements under each position. Do not put only 1 achievement as it will raise the concern that you did not achieve much. There is one exception here: IB Analysts who have just started their jobs in the last 2-3 months.
- Change any relevant word into “deal”, if possible. People who scored 1-3 in the table above often slip this rule but this principle can help them have a more growth equity-driven resume.
- In each achievement, remember to put the size of that deal, type of that deal, and your action/involvement.
- The order of deal size, deal type and your involvement should be consistent across bullet points. We often recommend this order [Your action/responsibility][Deal size][Dealtype]. Consistency will help the hiring team catch up with all the information quickly.
- Start your point with an action verb to get the attention and clearly express what you did
Those rules will be beneficial also for anyone who owns a strongly related experience to growth equity or private equity.
Step 2: Pass the interview
The interview process will include multiple rounds. Normally, Analysts and Associates will have 2-3 interview rounds; some firms even organize 4-5 interview rounds. Internship recruitment can be less heavy: only 1-2 interview rounds.
First interview round is to screen the candidate profile by asking some fit/behavioural questions, such as Why growth equity? Why this firm? etc. For Associate recruitment, it will be conducted by headhunters via phone. For analysts and interns, it will be conducted by the growth equity’s hiring team. Other interview rounds will be conducted in-person and will skew towards technical questions, case study, deal experience, etc.
Simply put, interview questions belong to 6 main categories:
- Fit/Background (Why growth equity associates? Why the firm? Are you comfortable with financial modeling? Are you a good team worker?)
- Technical Questions (Accounting, Valuation, Growth/profitability driver models, Quick IRR math questions)
- Deal/Client Experience (Evaluate the growth of a deal, Tell me about one of deal experience)
- Firm Knowledge (What is the firm’s current portfolio? Tell me about the firm’s previous strategies and exits. What do you know about the firm’s investment thesis? Which companies do you think are the best and the worst in the portfolio? If you had been able to do something different, what would you have done?)
- Industry Discussion (What are the major companies in this industry? Which top company will you invest in? What are the company’s growth drivers and risk factors? What is that company’s outlook in five/ten years?)
- Case study
Is growth equity a good fit for you?
So, the ultimate question is: How do you know if you are capable of working in growth equity? Below, we have listed out some of the qualities of an employee highly desired by growth equity firms so you can see if growth equity is a good fit for you.
- Competitive and willing to work long hours;
- Attentive to detail;
- Keen on working with deals instead of investing in public companies or following the markets;
- Interested in investing and operations and using critical thinking skills to boost company growth;
- Persistent to work in long-term projects such as building a portfolio company over years and are also open to non-deal work, such as company operating and underwriting.
You SHOULD NOT work for growth equity if you:
- Prioritize work-life balance;
- Do not perform well under huge pressure;
- Do not have an interest in investing.