How does a growth equity fund make money?
I received an offer to interview with a GE fund (coming from MBB) and I was wondering what the specific levers are with which growth investors makes money. If it is not from an increased valuation as these companies often experience multiple compression, how do they specifically make money from "growth". Please apologize if this question may sound dumb, I do not have a finance background (engineering). Your help is greatly appreciated, thanks! :)
There are 4 ways to make money:
- Top line growth - Revenue growth, increase of recurring revenue percentage
- Margin expansion - mainly increase in EBITDA margins
- Multiple arbitrage - buy low sell high
- Deleveraging - mostly seen in growth buyouts
Can also argue about “derisking” a company (decreasing customer concentration, improving product, improving mgmt, etc.) but harder to quantify.
Perfect, thanks!! :)
I think you're conflating growth in $ valuation and valuation multiple here. After you've invested initially in the growth rounds (likely Series B/C), the subsequent rounds are, hopefully, at a mark-up which implies an increased valuation but also as you mentioned at a lower valuation multiple – this is inherently because the business has de-risked itself over that time (i.e., initially made $100 in revenue and valued at 20x so $2,000 valuation but is now $200 in revenue at 15x so $3,000 valuation).
As the person stated above, you're essentially using your initial investment to grow the business / improve operational leverage in hopes of garnering an increased valuation.
Understood, thank you. And indeed, that is exactely what I messed up. I have read an article stating that GE funds make money through "valuation, leverage, growth" which got me confused. It would have been more precise if it was "multiples, leverage, growth".
Management fees on large sums of capital... GE is a scam.
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