How to think about Growth Equity vs. Traditional PE?

To front run my comments, I have worked in both for a number of years.

Growth Equity is essentially writing a check to fund growth opportunities and/or acquisitions. The ownership stake is traditionally minority and the average check size lends itself to smaller deals. Post-acquisition, the role of the fund is limited, in comparison, to traditional private equity. As a result, you are providing capital to an experienced management team (typically) in order to gather market share, either through customer acquisition or consolidation (re: acquisitions). This can also be for an inexperienced management team that has either created a market or entered a nascent market. Think of technology start-ups, there is not a tremendous amount of proprietary technology, but since the market is growing and continually evolving, the competition is trying to grab as much of the market as possible, as quickly as possible. Due to high-customer switching costs and sticky customer relationships, the strategy is to grab as much of the market to establish the Company as the leader in the industry. In order to fund the customer acquisition costs, which are typically not profitable, the Company needs to raise capital in order to scale quickly and make this possible. The hope is that the Company can eventually leverage these "captive" customer relationships and market leading position to begin to generate cash flow. I've seen this with consumer product focused ventures as well as technology ventures. As an investment professional, this lends to a different type of diligence than traditional private equity, as the analysis is not focused on the cash flow generation of the business, but more focused on how the Company can quickly scale to address the market and consumer needs. At the same time, in more consumer driven businesses, the ROI of customer acquisition must be justified, similar to a private equity investment. In summary, GE lends itself to a more passive role from a fund perspective, and differs significantly from a diligence and investment perspective. However, returns on GE investments can be larger (on a deal-by-deal basis) and the structure of the equity investment can vary, including liquidation preferences that guarantee a stronger investment return, under the same valuation at exit, than traditional PE.

Private Equity is typically classified as leveraged buyouts, with a control investment position. This allows the private equity fund to have greater control on the Company's operations, adding value through capital structure optimization, deploying operating partners to improve the Company's efficiency, and/or bring in outside consultants to improve operations. In addition, in some industries (e.g., services, restaurants, and others) there is a benefit to scale, think centralizing fixed corporate costs to improve profitability through a roll-up strategy (acquisition driven). In this scenario, once a platform investment has been made, the fund can outbid other funds for a target given the opportunity to improve earning by achieving synergies and being "Accretive" to earning. All of these aspects lead to a greater overall involvement from the PE fund perspective. Furthermore, this also feeds into the PE mentality of a size premium, meaning the larger the business, the greater the multiple (industry term is multiple expansion). Regarding returns, PE funds do not necessarily need to see Company growth to make positive returns, although that is ideal; PE funds can use the FCF of the business to pay down debt and improve their equity value, either at exit or through a dividend recapitalization.

In summary, GE is a more passive role for the junior investment professionals, while PE, in general, provides for a greater level of exposure to Company operations, accounting, legal, etc. In my opinion, the exposure in a PE fund has been invaluable and only further increased my value as an investment professional. To counter this notion, GE funds have more portfolio companies than PE funds, and since there is a lower level of involvement with portfolio companies, investment professionals can invest more time to find new deals, which are driven more so by relationships than bidding on competitive auction processes, which is more common in PE. From a career development perspective, the traditional idea is that you cannot go from GE to PE, on average, and that it is easier to move "down market," from PE to GE. Regardless, all of this is situational and on a case by case basis.

I would normally say to PM me, but I believe the forum could benefit on a greater level if you post comments/questions to the thread. To qualify, my comments are a generalization, based upon not only my experience, but also the experience of friends, and I'm sure a number of experienced of investment professionals may provide varying commentary, based upon their experience.