Seeking some clarity on growth equity and the vast landscape of funds out there. As far as I can tell, the are at least two distinct kinds of funds: (1) The late-stage VC-style fund, which does Series C and later in venture-backed startups (i.e. IVP, CapitalG, SoftBank, Sequoia/a16z/Accel growth arms), and (2) The more established fund, either independent (TA, Warburg, Summit) or the growth arm of a megafund (BX Growth, etc). Looking to understand two key things here:
1) The distinction in the type of companies the two invest in. Is Warburg Pincus/Thoma/GA/BX Growth typically investing in boring old enterprise software companies founded in the 80s/90s that have steady cash flow, or are they also looking at Series C and late venture-backed startups?
2) What type of deals are the WP/TB/GA/BX growth funds doing? Are they minority investments, per the classic growth equity definition? Are they buyouts of expected high-growth companies using minimal leverage, with the expectation of bolt-ons and operational improvements? A combination of the two?
Some examples of deals done by each type would be a great help in understanding this distinction as well...
You're reaching at the difference between Venture Growth (e.g., IVP, A16Z Growth, etc.) which does late stage growth (e.g., Series B-D/E, typically up until public or they no longer have check capacity to continue on). Thoma is straight up private equity (they have a growth arm but I don't think that's what you're referring to) focused on buy and build. Warburg does a mix of both but they're more traditionally PE players though they're probably the most flexible. BX has BX Growth and BX Horizons (or something like that), the former of which is more cash flow oriented growth and the latter is a crossover, buy on Revenue sell on EBITDA. GA is one of those ones that sometimes does venture growth but mainly they're PE.
The difference in diligence is that for venture growth you will probably spin up a revenue build model and some light P&L assumptions but unlikely you are worried about detailed modeling because you don't have to worry about cash flows or debt - that's not where you are going to make your money. In a crossover you will start to care about that because theoretically you are selling on EBITDA (I know some people thought to buy and sell on a revenue multiple but I think these days that's less likely, just my .02, you could theoretically be at a crossover that does not give a shit about EBITDA). For private equity because you are a full control investor you are digging through every single document to know everything you can about the company in a short amount of time - growth buyouts and traditional highly levered buyouts are indistinguishable in their actual investing process - I have done both so can speak to this personally.
Appreciate it. So do "growth buyouts," i.e. the kind conducted by a WP/GA/etc, involve less leverage? Are they more about a majority (i.e. 51%) stake compared with traditional LBOs, which take a larger stake? And what type of exit are they looking for? Obviously venture growth is looking at an IPO/sale to a strategic, but what about growth buyouts? Trying to get a better sense of the kinds of deals the aforementioned funds actually do, given that the available data is kind of all over the place.
Growth buyouts are still control buyouts where you are buying >100% of the business. Honestly, most likely you are buying the whole business and then reducing your equity check through management rollover is how they work. Often they do take less leverage, yes, because you reinvest more of the money back into the business. You'll often see these investors take down margins for a little while to ramp up growth initiatives and then cut costs later. These can always be PF'd out anyhow in hindsight. Exits are typically to larger investors or strategics if you are doing middle market growth buyouts. When you get large enough, that growth buyout looks a lot more like a tech leveraged buyout that's not as growthy, and that might be where IPO is a good candidate. Does this answer your question?
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I am hesitant to disagree with the dude who actually works in PE LBOs, but I believe that when the majority of people say "Growth Equity" they aren't talking about LBOs, they're specifically talking about expansion capital (typically minority investments) used to fuel additional growth, without taking full control of the company, and with the expectation of increasing the equity value of the company and thus increasing the value of their investment.
Notice how PE companies with growth platforms tend to explicitly differentiate between "traditional minority growth investing to growth buyouts and specialty capital." as phrased on TPG Growth's website. Another example is HIG's fund that does both Growth Equity & Buyouts. They call the fund "Growth Equity & Buyout" fund, differentiating between growth buyouts and traditional growth equity.
Venture Capital really just refers to dealing with companies in the earliest of stages. I also think Venture Capital has somewhat lost its meaning as there are MFs and groups like SoftBank who raise $100B funds and do shit like invest over $17B in companies like WeWork yet still call it "venture capital".
https://www.tpg.com/platforms/growth/tpg-growth/
https://www.lexology.com/library/detail.aspx?g=b6d33ac8-d907-4041-b6a3-…
https://corporatefinanceinstitute.com/resources/knowledge/trading-inves…
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