NEW INVESTMENT: Volition Capital Invests $10.5M in Screenverse  Read More

VOLITION NEWS: Pete Lamson Joins Volition Capital as COO & Head of Portfolio Operations  Read More

NEW INVESTMENT: Volition Invests $20M in HALO  Read More

VOLITON NEWS: Volition Capital Named a Top Growth Equity Firm of 2023 by GrowthCap  Read More

NEW INVESTMENT: Volition Invests $10M in Relish  Read More

7 MIN READ

Growth Equity vs. Private Equity

Key Takeaways:

  • Growth equity is a type of private equity focused on investing in established companies with growth potential, providing capital and strategic support to accelerate their growth and value.
  • Private equity encompasses investments in privately traded companies, including distressed companies facing financial challenges, and takes a more hands-on approach to improve operations, build value, and increase profitability.
  • The main differences between growth equity and private equity include the type of target company, equity stake, growth focus, and projected timeline.
  • Growth equity aims to drive growth and increase profitability in already successful companies, while private equity often involves buyouts and restructuring of mature companies experiencing operational transitions or financial challenges.

Growth equity refers to a type of private equity investment strategy that is primarily focused on providing capital to companies with a significant degree of growth potential. 

Growth equity firms seek out and profile companies who fit their unique (and incredibly high) standards, versus private equity which tends to be less stringent and tend to have more prospect ventures available to them through either inbound leads or networking. 

Understanding nuances between the two investment types on a more granular level can make clear the true and meaningful differences between growth equity and private equity.  

What is growth equity? 

Growth equity is a type of private equity that’s often associated with established companies that show promise and past success but need additional funding to grow their operation and reach their full potential. 

The ideal audience for these investments are mature mid-size companies in a growth phase.

Investors generally have a minority stake in the company and retain those shares, while providing not only capital, but also strategic support when it comes to hiring, internal operations, networking, and more with a goal to help the company accelerate their growth and value on an accelerated timeline. 

On the other side of the handshake, investors might receive a share of profits or equity ownership of the company. It depends on the arrangement. Considered a bit of a combo between venture capital and private equity, growth equity is the best of both worlds in a sense and certain investors see this value prop more clearly than others.

The ideal company scenario is made complicated by the fact that many of these companies don’t necessarily need to raise capital at the time of approach, which fuels a search to find the most attractive companies and an airtight value proposition strategy on the part of the growth equity firm. Once this occurs, the gears begin to shift into motion and a partnership is formed. 

What is private equity?

Zoom out from growth equity and you’ll find yourself at private equity, an asset class of investments in privately traded companies. 

Essentially, you won’t find these companies on a stock exchange so this is the only way investors can acquire ownership stakes with the goal of generating returns.

While growth equity firms typically play it safer by investing in established companies with growth potential, private equity firms don’t discriminate in this way. They are more willing to take the risk and partner with distressed companies that are facing financial challenges.

In order to secure a return, private equity firms generally take a more hands-on approach to their companies as they provide capital, strategic guidance, resources, and expertise covering a variety of business areas. 

Private equity and growth equity firms have similar goals: to improve a company’s operations, build value, and increase profitability. 

Primary differences between growth equity and private equity

By understanding the difference between growth equity and private equity, investors and founders are able to determine specific investment strategies and company goals, allowing them to make educated decisions and streamline partnerships to maximize company growth and success. 

The four major players involved in growth equity and private equity investment strategies are the type of target company, equity stake, growth focus, and projected timeline. 

As previously mentioned, growth equity investments generally target growth potential companies who have an established business model and generate steady revenue (capital efficient) while private equity investments take the risk of partnering with companies who fall under a wider umbrella. 

While growth equity investors provide capital and take minority ownership in a company, private equity takes a more active role as they control a more substantial portion of the business in return for capital and additional services. 

Over a longer period of time, private equity investors also focus more fully on the company’s operations and overall performance while growth equity strategy heavily aims to drive growth and increase profitability.    

Growth equity vs. buyouts

Though they both fall into the private equity landscape, growth equity and buyouts differ significantly when it comes to risk profiles, ideal target companies, and investment focus and approaches based on strategies relating to objectives and expertise. 

For one, buyouts are when another entity takes ownership equity, or essential control, of another company using investment tactics like owning a majority of the shares, or by acquiring a majority of the stock. It’s almost always with the goal of taking ownership of a company and driving organizational change.

In growth equity, the investors tend to allow the founders and leadership to retain their decision-making power.

Two types of buyouts

Buyouts are synonymous with acquisitions, but we tend to see two types: a leveraged buyout (LBO) and a management buyout (MBO). 

A leveraged buyout entails the acquisition of a company through a blend of debt and equity, whereby the cash flow generated by the target firm serves as collateral for the loan, ensuring its repayment. Simply put: an entity takes on debt to fund the acquisition and the assets of the acquired company serve as collateral for the debt. 

Technically, a management buyout is a leveraged buyout, however the incumbent management team of a given enterprise undertakes the acquisition, assuming ownership from its prevailing owners. Simply put: the leadership team are employees turned entrepreneurs. 

When compared to growth equity, buyouts carry an increased risk because of the high volume of potential challenges that come with the territory of restructuring a business. But, with greater risk is the possibility of greater reward if the investor is able to successfully turn around the company. 

Ideal target companies for buyouts are mature companies that may be experiencing operational transitions or financial challenges. In terms of investment focus and approach, buyouts often act under the intention of taking a company private and involve obtaining a controlling stake in the company and greater influence on strategic and operational decisions alongside management. 

The opposite is the case with growth equity firms, who are actually looking to expand upon a successful company’s opportunities, just giving them a faster way to achieve their growth goals through funding. 

An example of growth equity

Known for being friendly, fast, and hyper-focused when it comes to the customer experience, Chewy is a convenient way to shop for premium pet supplies within a highly personalized e-commerce experience. In 2013, Volition Capital, a growth equity firm rooted in the practice of striking the balance between risk and reward, realized that Chewy’s commitment to delighting their customers was a special and rare occurrence that carried potential and had already produced success. With the best selection of products at the lowest price with the most superior customer service, Chewy was the ideal partner for a growth equity firm seeking lucrative and people-centric partnerships like Volition Capital. 

An ideal example of a successful growth equity venture, Chewy brings a loyal customer base, high-quality products, capital efficiency, and a team of genuine animal lovers while Volition Capital brings capital, expertise, and strategic counsel around in-sourcing fulfillment, private label expansion, M&A discussion, and brand marketing. The result turned out to be equally as ideal: Chewy sold to PetSmart in 2017 for $3.35 Billion, which is known as an “exit” from the growth equity partnership. As of September 2019, Chewy was worth ~$11 billion, and PetSmart is shaping up to be one of the most successful private-equity turnarounds in history, according to the Wall Street Journal

Conclusion

Though growth equity and private equity often frequent the same circles, growth equity tends to be more about accelerating already existing growth and value creation rather than course correction and making major repairs, especially given their key attribute as a capital efficient organization. 

Companies that fit this profile are just harder to come by, given they’re typically not in a place where they require funding. 

Either way, we grazed the surface with this topic, but not without the understanding that both growth and private equity play a special role in the investment world and mean different things to different businesses. 

Want to stay up to date on everything Volition? Make sure to subscribe to our newsletter using the button below!

ALL ARTICLES
BACK TO TOP

Consent(Required)
This field is for validation purposes and should be left unchanged.

Consent(Required)
This field is for validation purposes and should be left unchanged.

Consent(Required)
This field is for validation purposes and should be left unchanged.

Consent(Required)
This field is for validation purposes and should be left unchanged.