Growth Equity Investment Process
For the growth equity investors here how does your investment process run? And specifically, when you underwrite a deal what is the targeted MOIC? Is it 2.5x to 3x like I see on the buyout side? Is it higher than that depending on the stage (Series C or D vs pre-IPO)?
Also, does it differ by type of growth equity fund? I.e. Sequoia's growth fund that is investing in late stage Unicorns will have a different return profile than a TA or Summit that is sourcing a vertical software winner in flyover country?
Appreciate the help!
Yes. It's a spectrum from venture underwriting to PE underwriting. On one hand you have firms that underwrite the return the fund case for every investment (e.g., Seed investing only makes sense if you can envision the company as a massive winner). On the other hand you have guys like the major tech PE LBO firms who underwrite high teens IRR. It's shades of gray in the middle. Series B-D guys still have to underwrite an MoM and that will look different depending on their stage. TA guys probably underwrite 25%+ in classic growthy LBO fashion.
Sorry if naive but I’ve never heard “underwrite” used in growth context. Can you explain?
It just means what threshold of returns you're looking for. For example, an investment may only make sense if the team can see it being a 2.5x
Bump
My fund mostly looks for 2.5-3x MoM over a 5yr horizon. But beyond the returns funds are willing to underwrite, look at what risks they are underwriting- is it product, expansion in existing countries, intl expansion, new product launches, upsell/cross sell. That’s what is quite important in the investment style and where some funds differ rather than arguing over 50bps of IRR.
We underwrite to a 4.0x MOIC in a Base case. We also have a very hard time deploying capital in this market :)
Thanks for the color - I can only imagine it’s challenging to deploy right now while penciling 4x in a base case. What type of growth investments are you looking at - Vc late stage unicorns or Summit / TA / AKKR type of stuff?
hybrid fund...so late stage VC / growth buyouts (GA type model)
Got it - related to the investment process how have you seen MIPs for mgmt structured on growth buyout deals? I have experience on the tech buyouts side so I wonder is it similar - ie 10% MIP, partial time and partial performance based vesting? What typical % does your firm give CEO and CFO?
I’m working on my own investing initiative now where the deal dynamic are growth equity / buyout. Happy to DM if you prefer.
Spend more of my time on the minority growth side than buyout. But, I don't think we adhere to a "rule of thumb" approach regarding MIP. At the end of the day, we care about management alignment post-transaction, which can come in the form of significant earn-outs, seller financing amounts, MIP, or rollover equity. Sorry if that's not very helpful.
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