Downsides of Growth Equity vs Private Equity?
Current first year analyst at a reputable MM IB doing off cycle recruiting for both PE and growth equity.
On this forum at least, it sounds like everyone loves growth equity, with the only major criticism I've noticed being the emphasis on sourcing. If it's so great, why wouldn't everyone just recruit for it instead of traditional PE?
What are some drawbacks, downsides, or negative aspects of the growth equity industry that might make someone not want to join a firm in that strategy?
comp
All the below are very general commentaries and there are multiple exceptions to each bullet. They're also only cons for certain people (would love to make more money but have no issue otherwise)
- Lower comp
- Sourcing isn't for everybody and if you suck at it you won't move up
- Potentially involved in less execution work
- Potentially involved in less portfolio work (esp. if firm is heavy on minority deals)
- Less operational involvement at portcos
- Simpler modeling / financing structures
Thanks for this breakdown.
Besides comp and natural sourcing skill though, I'm still struggling to see how any of the other aspects of the work are real negatives. It just sounds like its less work overall since the investments and modeling that go with them are simpler. Why wouldn't you want a job that's less complicated and easier to do overall?
Some people get off on building really crazy models and learning about how to optimize costs at a granular level. But agreed not my thing
Above is good and I will also add that
- Less optionality as PE to growth is sort of possible, but growth to PE is tough
- Similarly growth generally has fewer exits to HF if that is of interest
- Right now growth equity is just really really really difficult which can be frustrating for a junior looking to get reps
- Way more difficult to get a seat in a good fund than in PE simply because less seats and less turnover (and the market now too)
So not difficult to see why for the average risk-averse prestige seeker PE can be better. That said I'm in growth and would never change!
Is moving around between growth firms also tough? Most of the looks I've gotten are what this site would classify as up and coming firms focusing on bootstrapped investments. What if I want to go to a crossover fund or one of the larger growth firms later on?
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What was the size of the growth shop you went to? Was it one of the big ones (Insight or GA)? And do you think you'd ever go back to one of these growth firms?
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late comment but in similar situation going to growth out of undergrad, what did u do to hone skills outside of sourcing and how did u move to buyout
Curious what you said about your growth experience / moving to buyout?
Can someone explain why it is that Growth demands a lot more sourcing than PE? What’s the market dynamic of each that makes the acquisition process act that way?
check size / stage / thesis
It definitely depends on the shop but generally speaking Growth today is really a combination of late stage venture and middle market PE. There are hundreds of thousands of deal opportunities that fit the minority or majority growth investment thesis, so to have any chance of generating “alpha” you need to get in front of as many deals as possible that fit your thesis. You can’t simply be the Series B-D investor for Benchmark, Sequoia and USV, as those deals are going to be priced ridiculously and competitive. Buyouts on the other hand can be broken down into 2 flavors as well, Large cap and MM+. With Large Cap/MF a majority of deals are sourced by banks and value creation comes from M&A, financial engineering, etc. With MM+ there’s a combination of both banked and proprietary deal origination.
This is where Growth and PE really overlap. Personally I see the distinction between Growthy buyouts and MM PE as someone in growth will do both sourcing and execution, whereas someone in MM PE might only do execution whereas their BizDev/Capital Markets teams will handle sourcing.
Mostly the fact that if you do growth equity you’re a pussy
Why's this the perception?
Switched from a MF to a ~2bn growth equity fund and it was the best decision of my life. For me i really enjoy building relationships and the sales aspect of growth. Can echo that the technical work isn’t nearly as challenging as what it was at the MF i was at. Overall WLB balance is better and actually feel like i can provide value to the firm.
What firm did you go to?
Is this a venture growth or bootstrapped growth style firm and majority or minority or both?
Curious as to how boostrapped growth involves that much less work than standard MM or large cap PE given deals require similar levels of diligence even if the cheque is smaller (barring massive or complex deals)
Would love your thoughts on what the top comment below states too!
I went from Growth Equity to PE and will just share my reason for switching. I didn't think my growth equity experience helped me build a useful skillset as an investor. The idea of sourcing might sound fun for extroverted people, but I assure you when you are on your hundredth call with a bootstrapped company in some tertiary U.S. city it's a lot less glamorous. Most of these founders are not very sophisticated or capable. The majority would set out growth targets for the following year and when we'd check back they wouldn't be anywhere close and would blame it on XYZ other factors. And then the 1% of companies that are exceptional tend to have a lot of firms circling them. I personally got bored of talking to founders and asking them the same series of questions (what's your ARR, EBITDA margin, expected growth next year, etc) and wanted to build an actual investor skillset where you diligence companies.
Super helpful and also a thing I worry about. I feel like as someone with so little experience in the industry that I should be taking roles that build that investor skillset as much as possible. I do like the idea of talking to founders but I have heard this idea of it becoming mind-numbing after a while from my networking experience too.
Could I PM you? I’m also considering making the jump from GE to traditional PE.
I would echo this point. I was previously at a large GE fund (maybe you could argue its closer to latestage VC) before switching to PE. You’re typically not finding alpha through value creation because these are already high growth, scaled businesses. So it really comes down to whether you can find alpha on price (how much you’re willing to pay based on your evaluation of future growth potential compared to other firms), which will be hard when everyone is chasing the same high quality asset and working off the same thematic data.
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