Why Growth Equity vs Buyout?

Trying to be thoughtful before starting in a BB analyst program soon and wondering if those who were interested in both traditional buyouts and growth equity (or just one) went about narrowing down to one? Just kind of curious what things other people considered. Thanks!

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Comments (34)

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  • VP in PE - LBOs
Apr 30, 2020 - 10:39pm

Generic talking points you can mix and match between:
- More interesting to focus on pulling growth levers vs. cutting costs and financial engineering
- Companies tend to be more interesting (consumer, tech, healthcare vs. industrials, manufacturing)
- You're more of a partner with management teams vs. an owner; less focus on replacing management vs. working with founders
- Opportunity for funds to differentiate themselves through ops and strategy added value vs. last dollar valuation (in theory more sustainable vs. returns being competed away in traditional buyout)
- More entrepreneurial (smaller deal teams, associates tend to have closer relationships with management teams and take on interesting ops projects, associate often play more of a role in sourcing) ** **** **

Apr 30, 2020 - 11:27pm

Do you like sourcing or not? If yes, then growth equity, as most firms in that space are heavily sourcing focused at the junior level.

BTW, sourcing gets a bad rap. It can certainly be a grind, but i actually think the soft skills you develop in that type of role can be just as valuable as the more technical skills (e.g. financial analysis and engineering) you might develop in buyouts. Possibly more transferable too.

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  • Analyst 1 in PE - Growth
May 1, 2020 - 10:55am

Two folks at my fund joined as Sr. Associates and made VP in 1-2 years but both had BB/MM IB experience and received carry upon joining

May 2, 2020 - 11:29pm

Assuming you are in OP's shoes (IB analyst) and your end goal is GE, I don't think it makes sense to work at an operating company first as you are basically taking a roundabout trip to the same place. Also, as mentioned, it's not always easy to get into a new industry at a mid/seniorish level, especially when it is an industry that is quite competitive.

Note that I am not saying that opco experience isn't beneficial. What I would suggest instead is IB > GE > opco. Many friends / colleagues have done this, and it actually works out quite nice. GE is usually a 2-3 year stint with an expected exit, and oftentimes you can just exit to a portco of your firm. Then go back to GE (sometimes with an MBA pit stop) and just say you wanted to be in GE long term but felt it was good to get the opco experience to understand the day to day of how real businesses work.

May 1, 2020 - 11:10am

Could anyone speak to the diligence process for investing in a growth stage company (series b+) vs. traditional buyout?

I'm interviewing with an emerging GE fund to be a the sole associate and I'm trying to wrap my head around the actual work / deliverables. Less sourcing focused, more pipeline, diligence, and execution focused.

May 1, 2020 - 3:33pm

In my opinion, growth generally describes mid to late stage investments, so slightly larger businesses, ~$10+ in revenue, that are growing quickly and generally want money to burn as they grow.

The farther you get into late-stage growth, the more similar the workload will be to buyouts. Growth stage work will usually involve a fair amount of sourcing, both for deals you could immediately work on as well as earlier stage deals that could develop from a VC/Early Stage investment, into a growth round down the road. As far as technical analysis goes, the analysis is probably slightly simpler as most of the positions will be minority positions with no debt; however, you'll be more focused on cap table math and figuring out distribution waterfalls, dilution, etc. You'll also likely be doing more market analysis, ie does this company have the potential to get from $10M to $100M, what is driving that? What are the unit economics, retention/churn, essentially trying to validate what the CEO/founders are pitching to you as the big opportunity. Again, the later the stage, the more info you'll be able to dive into. In Airbnb's recent round, I'm sure the Sixth Street guys/gals on that were cranking through data and focusing more on Airbnb's burn rate, what the future looks like for them, at what valuation does the investment make sense, etc.

There's also much less operating control of the businesses. At a bigger growth fund, there's little chance that the investors have much sway and even less chance that at the junior levels, you'll get much exposure. Less control is a double edged sword, it makes things easier, but you also have less control over the investment.

For buyouts, it's a little more technical in that the deal is usually won/lost in the capital structure/financing piece of the deal. Growth assumptions are usually more modest and making money comes more from cost optimization and appropriate leverage. That is what makes the modeling more important, making sure the business can take on leverage, service debt payments appropriately, and generate enough cash is typically the most important part of the deal. These are also usually things that are easier to predict than a growth business' unproven revenue streams. PE partners often times take board seats, bring in new management, and juniors will sometimes have some role in the operations piece of the business. It's more project manage-y at times, making sure the business doesn't trip covenants, working with lenders to get the right financing, moving pieces around to make the business (appear) more profitable.

Neither one is better/worse than the other, kind of just depends on what you're interested in. Some people love growth investing and say that it's closer to true investing, others would say its glorified gambling. For those who love LBOs/Buyouts, they love the structuring piece of the deal and being able to create value in something where others might not see it. Critics of LBOs will say they're just chop-shops, levering up businesses, paying themselves out, and letting the business suffer.

I'm sure there's more I'm forgetting, but that's my high level take.

May 1, 2020 - 11:39pm

What do you mean by capital structure/financing win/loses deals? I assumed most large buyout fund will have access to similar turns of leverage when bidding for the same asset?

Also how would deal team members identify $xm of cost savings early in to the sale process prior to assigning DD advisors?

May 2, 2020 - 10:49pm

In terms of cost savings, it's really assumptions and insights into the sectors provided by senior banker who have been there and done that.

Well while it's true that access is one thing, how you structure the capital structure is another and that's where maybe more sophisticated funds have an edge. Besides' he's comparing Buyouts to Growth so capital structure is definitely a lot more important here

May 2, 2020 - 3:11am

If you're interested in both, you can pursue both in recruiting.

To the Head Hunters with elite growth clients, you can pitch yourself as growth. To the head hunters with stronger tradiitonal PE shops, you can say that.

No need to narrow your options ahead of time. Think PE experience is more dependent on the firm (and its culture / style / operations) than an "investing strategy"

Obviously some exceptions, but my two cents

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