Are some firms who call themselves growth equity really growth buyout?
My understanding of growth equity has always been firms that invest into companies at a later stage when they have shown solid traction and performance but may still be cashflow negative - perhaps series B/C onwards. However I recently spoke to a vp at a “growth equity” firm and he told me that they only target profitable (I would assume to mean cashflow positive?) companies with little to no outside capital. Indeed, when I looked at his firm’s investments on pitchbook, they dont come up as part of a priced round. Some firms like this are Kayne Partners, Long Ridge Equity Partners, Great Hill.
I do not think these firms are truly growth equity in the sense of venture growth but then how are they different from traditional PE shops? In that they are open to taking a minority position in a company vs a mgmt buyout? Can someone help me understand exacty the types of companies these firms target and what these firms would be diligencing for? I would much rather prefer thinking about topline growth and scalability vs cutting costs or operational improvements...
As someone interested in disruptive companies that have the potential to become unicorns, are these firms a good fit or should I seek out roles with more familiar venture growth firms like summit, TA, GA etc?
There are many ways to approach private equity investing. Growth equity has evolved a lot and it's really tough to strictly define the strategy without the context of the fund. For some funds, growth equity is just investing from Series B to pre-IPO. These funds could be considered late-stage VC since a lot of the business models are unprofitable. For others, growth equity is investing in profitable businesses. Funds that focus on profitable businesses are providing growth capital to help a company potentially expand into new markets or develop a new product. These investments may not need the growth capital to stay afloat, but the capital will help them scale faster.
I do not think the guy who you networked with is wrong in saying he works in growth equity. Not only are these funds not doing a majority buyout of the shareholders, but they will not use leverage to purchase the minority stake. I would say it's kind of tough to seek out strict differences for some funds because there are traditional buyout funds that will do growth capital deals if they find the right opportunity and there are VC funds that will invest in later stages given the right opportunity. Growth is just in the middle and you see funds on both sides of the spectrum move to the middle when the moment is right.
In my opinion, if you are interested in highly disruptive companies then you should only target funds that are structured more like a late-stage VC fund. Profitability and disruption aren't highly correlated in the private investing world. That's not to say that you will never see a profitable disruptive company though. You just won't really be investing in the Ubers of the world if your fund's focus is on profitability.
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