Growth Equity/Growth Buyout Exits

I've posted about this before and have looked elsewhere on WSO, but this forum seems to be full of contradictory answers. Trying to understand what the strategy is among the General Atlantic/Summit/TA/PSG/Insight tier of growth equity funds. Some responses on WSO indicate that all of those funds do growth buyouts (either bootstrapped or otherwise), while others say they do minority growth only, or a mix of the two. So, two questions:


  1. What exactly is the strategy at that category of fund? In addition to the ones mentioned above, I'd also add Great Hill, CVC Growth, and BX Growth. Feel free to add any you can think of.

  2. What types of companies are they going after? Bootstrapped or venture-backed, etc?

  3. What is WLB and work like? Decent hours and more interesting deals (think software or consumer instead of middle-market garage door manufacturer) have always been part of the attraction to GE. Does that hold for these firms?


Appreciate any and all insight.  

 

What are some funds that do growth buyout? Sorry to detract from your question - just could not find much information on growth buyout funds on WSO

 

Newer strategy for Apax, first fund was raised in 2017 and this latest one at somewhere around 2B in 2021. Do a mix of classic minority growth and buyouts. Most associates / mid level people seemed sharp when I interacted with them on the sell side. Portfolio seems to be doing well compared to the funds that deployed a ton of capital at ridiculous multiples in 2021. Tradeoff is that you aren't doing sexy deals with them (they kind of had the reputation of being cheap amongst bankers), but given the heritage of Apax's tech investing, would assume its a great role to start a career in tech investing.

 

They don't do the sexiest deals (and some of those haven't turned out so well - ClassPass) and are not considered a top player in growth. Doesn't make it a bad fund to start one's career though. People are mixed from what I've seen - definitely can find smart people there, but honestly that's true at most funds beyond a certain level...

 

Curious about this because I have a first round here coming up - others I've spoken to in growth equity have said that their fund 1 returns are top decile with deals like Guesty and Wizeline being massive winners. Would assume they haven't been around long enough to prove themselves but given Apax brand name and historically strong tech investing legacy, people in industry I spoke to (given small sample size) seemed to think highly of it. Would you mind elaborating or pming me?

 

It’s confusing because a lot of these firms do both.

Summit and GA will do VC style high growth minority deals as well as buyout styles. It’s typically separate teams for each. GA was historically minority but has expanded into buyout.

TA is mostly majority growth buyout (and frequently use debt).

Insight does everything, typically their VC is earlier stage minority and the later stage is buyout but they do it all.

Company profile is different, typically minority growth deals are primary capital (so cash burning businesses) aiming for IPO and are frequently Silicon Valley style VC backed companies.

Growth buyout is traditionally “ugly” SaaS (so think of like software for plumbers type stuff) and profitable, usually either buying out founders or buying from another PE firm

 
Most Helpful

You'll learn that Growth Equity is a catch-all that a lot of things get bucketed into since it sounds sexy and a lot better to sellers than private equity. There are two main categories that people bucket into "growth equity"

1) High Flying Late Stage Growth Equity (also called Late Stage Venture Capital): this is your late stage Uber, Airbnb, etc. growth equity rounds. High valuations get justified since these are future IPO candidates so firms fall over themselves to get the deal done. Capital largely used to add fuel to the fire of product-market fit. Some Firms in this category: General Atlantic, TCV, a16z Growth, Softbank, Sequoia Growth. These strategies are a lot closer to VC than to PE. The prior investors on the cap table are almost always VC firms.

2)  Growth Buyout: strategy is to buy bootstrapped, growing, profitable businesses in niche markets with a believable go-forward growth story. Deals tend to have a healthy % of secondary to cash out founders. Deals here are not done to fund unprofitable growth. The TAMs are typically (not always) a lot smaller than late-stage venture/growth equity discussed in point #1. It's not uncommon for investors in growth buyout to get a decent ownership % and sometimes have majority control. Debt-financed deals very common as well. Example firms = TA Associates, Summit, Mainsail, PSG, Accel-KKR. In reality, this strategy looks a lot like traditional private equity, except you're dealing with targets that have better growth prospects than the sleepy targets that traditional PE goes after, and there's less financial engineering needed (generally, not always). What's funny is a lot of times, the deal is announced as a "strategic growth investment" when a lot of times it's actually a secondary deal with founder taking chips off the table - it's framed as a "growth investment" since it's great marketing for all parties involved and the investors claim to have consultants who can help with growth, GTM, etc. A lot of deals done here represent the first insitutional capital for the targets. Associates at these firms have a lot of fun trying to make heads or tails of Quickbooks financials :) 

Of course #1 above is much sexier than #2, but somehow they both get bucketed into "Growth equity." Importantly, the job of investors is much different at each of these firms. #1 you think more like a VC and the art of the possible. #2 you are doing PE-style, down and dirty due diligence on companies that have never put a board deck or company P&L together - very sweaty.

 

Awesome, thank you for this. 

So presumably #2 is sweaty the way traditional PE is, and the WLB everyone always talks about with GE is at the venture growth-style funds?

 

Correct - the WLB people refer to when they talk about growth equity is #1 above. It looks a lot more like VC but with more financials to use for underwriting. So what's the catch if it seems so great?
1) The pay likely looks more like VC (lower) than PE at the junior levels, unless you are at one of the top firms.
2) There's only ~5 firms that do this strategy successfully, which means it's very difficulty to get a good seat. And even then, will you be able to climb the ladder? Do they kick you out after 2 yrs?
3) High beta - very dependent on where we are in the market cycle. The market has been a hellscape since the market pullback in 2022. 
4) What's your durable edge in this market if you want to make a career in this? It looks a lot like VC - who do you know and do you get the look for that sweet, sweet pre-IPO round on a unicorn that everyone wants in.

 

Great summary. What’s the appeal of growth buyouts (minorities or maybe majorities in these bootstrapped businesses) vs MM PE (focused on growing businesses, so still less financial engineering oriented)?

Is growth buyout just as, if not more, sweaty than MM (or large cap) PE given you spend a lot of time on cleaning up company financials etc and see more dealflow? In this case why take the pay cut (given smaller deals) and work much harder, vs doing similar deals in the MM…I understand if the businesses were a lot more interesting than PE businesses (like going to VC growth) but it sounds like they’re not, perhaps growing slightly quicker on average…

 

Before I hit the why growth buyout vs. MM PE, I want to make one point clear: I think there's a fundamental misunderstanding by a lot of folks in IB of what they are getting themselves into at these firms. It IS private equity. The "growth equity" fluff is marketing, and hey, maybe they did strike gold on a bootstrapped software company that somehow went public and that logo is all over their website.

So knowing the above, why would you choose growth buyout vs. MM PE?
1) Sourcing - at a lot of these firms, sourcing is a big component. You are not just sitting back and letting bankers send you pitch decks. You are on the road, attending conferences, etc. trying to find bootstrapped firms that haven't hired a banker yet to run a process. That's the alleged secret sauce of this strategy - less so now given how the strategy has matured, so firms today are bidding on a lot of banker books as well. Sourcing is not appealing to a lot of people, but it is for others. Just know that once you source that deal, you are doing intense PE-style diligence on it. You are not throwing together a quick model and firing off a check like a VC might after they source something. I tend to fall on the side of sourcing is just another thing for pre-partner investors at these firms to have to worry about.
So you MUST love sourcing for this role. I have a friend who thinks of himself as an enterprise software sales rep: on the road, meeting new people, trying to sell them on taking his deal, and once in a while one clicks that gets added to your pipeline (you will literally maintain a salesforce account). A lot of times, the "why invest" question is almost an after-thought for a lot of these deals - it's all about getting a proprietary, low multiple deal to IC. If you can do that, you're a good "enterprise sales rep." Important to contemplate since no other area of investing would characterize themselves in this way, but it's fundamental to this type of strategy. 

2) Because the targets are mostly bootstrapped and not institutionalized, it can be interesting to see the business become institutionalized after you acquire it/invest. Then you sell it off to a strategic or MM PE firm that doesn't have to do this dirty work. Like most things I've learned in growth buyout, it cuts both ways - it's interesting, but also a sh*t ton more work since associates and VPs at growth buyout firms end up becoming quasi-FP&A and corp dev for their portfolio companies.

3) You like investing in bootstrapped software companies instead of widget manufacturers in the midwest. Half-joking, but you get the point. I do think this sells a lot of people on growth buyout.

In conclusion, the case to do growth buyout instead of MM PE is a tough one to make. Growth buyout works arguable just as much or more, and the pay likely a bit lower than traditional PE. That being said, there is an appeal to invest in a boot-strapped software company based instead of a widget manufacturer based in the midwest...you just might have to source, diligence, and be the FP&A for that boot-strapped software company ;)

And to confirm where I stand on this - I largely do NOT recommend growth buyout. WLB is awful, the growth equity narrative is marketing for potential investments and for future employees, and the pay is typically between VC and traditional PE - which is a weird place to be considering you're likely working more than the ppl in PE and dealing with the headaches of targets/portco's that don't know how to put together a P&L.

 

Any thoughts on Warburg? Seems to do a little of everything with an emphasis on late stage growth. Would love to hear about reputation, returns, WLB, etc.

 

At a 'growth buyout' shop that's a direct comp to some of the previously mentioned.

You gotta love sourcing to do the job, full stop. You're not under LOI most months of the year and thus are expected to be setting up calls with software companies that might fit your fund's mandate, getting on the road to conferences and at company offices everywhere from NYC to middle of nowhere flyover state. More portfolio/board responsibilities overtime of course, but also comes with more travel. VPs where I'm at are pretty much on the road 2-3 days a week, if not more.

Most good growth PE funds will make 5, maybe 10 platform investments per year so chances are that something you source either (1) dies at IC (2) dies after you bid / lose on price (3) dies after you sign it up and find a red flag. Not saying that you don't have a good shot at closing a deal, but you gotta actually enjoy the process of meeting new people (most of which are characters), learning about new businesses / verticals, etc. vs. being a deal junkie. Similar to MM PE in that you look at a ton of assets and invest in a few, but harder in that you gotta find most of these vs. running at banked processes. Similar to VC in that you're always sourcing, but harder in that a much lower % of companies will ever be actionable.

Personally, I think it's neat that I spend most of my day with 'salt of the earth' entrepreneurs building real, durable businesses and get to go deep with a few overtime. But not everyone's cup of tea.

 

Yeah, growth buyout loves finding "salt of the earth" types who will sell them their biz at a discount since not sophisticated enough to hire a banker... ;)

The salt of the earth pitch is another marketing ploy. I once heard a growth buyout firm call themselves "blue collar." Laughable. These are sophisticated people who know exactly what they are doing and the signal that they want to send.

You end up hiring associates and VPs who self-select for this signal, but they ultimately figure out the joke, get tired of working more than PE and getting paid significantly less.

 

Would you argue that your experience has personally developed you as an investor? As in, if you quit now and had a sizeable amount of cash at hand, have you learnt from and spoken to enough people were you can confidently run your own business? 

 

Absolutely agree here

You need to be ok with thinking of yourself as an enterprise software sales rep instead of an investor (the investing is almost secondary - people won't admit it but it's true. If you get a proprietary, low multiple deal to IC, it's very rare it gets shot down). If not ok with thinking of yourself as a enterprise software sales rep, you will not be a good fit in growth buyout. I don't think most folks coming out of IB appreciate this enough and realize very quickly they are in the wrong seat.

I think a lot of people also get bogged down by the pay. It's not uncommon to be more accomplished and doing more work than the CFO of one of your portco's from Tulsa for an add-on M&A deal, and having to suck it up and work like you did in IB to get it done, knowing that the CFO who you are doing their job for is making a 2x your compensation, while you're based in SF/NY/BOS. It's a steep pyramid structure that doesn't pay off unless you are in it for the long haul and partner track. Oh and you will be making less than your friends who stayed in IB or went the traditional PE route.

 

Would you argue that the experience of being a pseudo CFO, and the knowledge you gain from all the DD, will personally developed you as an investor? As in, if they were to quit now and had a sizeable amount of cash at hand, wouldn't they confidently run their own business? 

 

Lots of great views here and I agree with how people have discussed bucketing. As an LP, most growth equity firms have really become growth buyout... GA still does a lot of minority but groups like TA, Great Hill, Spectrum have really moved more toward buyout. Even if they're doing minority, those are really smaller checks so balance of capital in a fund really goes toward buyout. So if a fund is 50/50 control/minority by deal count, by capital they are probably more 75/25 given larger checks to buyout.

Most LPs will put growth equity and buyout strategies into one sub portfolio within private investments and have each strategy compete for capital from a bottoms-up basis. Some might put higher growth, primarily minority mangers (Elephant, Volition etc.) into venture but that is less the norm.

Generally, as fund sizes scale, growth equity firms become growth buyout. Large fund sizes tend to require the move to buyout since more dollars need to go to work. Anecdotally, I would say more entrepreneurs were willing to sell control in recent years because multiples were so high.

 

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