Growth equity is often compared to venture capital and buybacks but is something in between. Investors buy stock in a company that has the experience and good returns so that it can grow even more. Companies need to understand the difference between all types of capital investment and when it will be beneficial for them to use one method or the other. Growth equity and private equity are also often equated with each other, but they also have undeniable differences, which we will discuss in more detail in this article.
Growth Equity – Meaning
Growth capital often referred to as expansion capital, is the kind of investment that can only be made in partnership with an established and experienced company with a good outlook that wants to expand its production, increase its reach or enter a new market. During this financing, investment firms provide minority stakes in the company and thus greatly accelerate its growth. Oddly enough, companies that are financed with growth capital don’t need it, but they are willing to give up some part of their ownership of the company to get immediate funding and the opportunity for growth later on.
The investment encourages the company to grow more intense and saves them a lot of time to achieve their goals much faster than if they used funds from their earnings. Through this type of investment, companies can achieve economies of scale and significantly reduce their costs and increase their profits, and, equity firms can provide organizations with useful advice that they can use in the future.
Differences between growth equity and private equity
So what are the main differences between growth equity vs. private equity? Technically, growth equity is part of the private equity industry, but it still has its specifics, which is why it is often referred to as the “golden mean” or “borderline” between private equity and venture capital, and its main goal is to bring together the best characteristics of the two types of transaction and offer that to the client.
Below we describe the main differences between growth capital and private equity:
- Investment level
The two concepts differ already at the investment level. Whereas private equity implies acquiring a full stake in a company, growth capital only takes possession of less than 50% of the shareholding.
Growth capital is thought to have more risk than private equity. Of course, everything depends on the specifics of the deal and its terms, but since growth capital provides investments to companies with an unrealized growth strategy, the outcome of such strategies can be quite unexpected, in a bad way.
When providing investments in the case of growth capital and private equity, investors’ expectations about the use of these finances are fundamentally different. Whereas in the case of growth capital, investors care that the money goes to a specific business plan, in the case of private equity, PE firms also certainly care that the company grows, but how they will dispose of the money given out is irrelevant to them.
The ideal client, according to private equity and growth capital investors, is also different. If for PE firms the best option is a reliable and profitable business with good ideas and a smooth financial situation, then for investor growth capital profit is not important right now, the most important thing is to make a significant increase with the help of financing. So while they focus on established companies, they do choose fairly young organizations that have a strong growth strategy and plan to attract clients.