Capitalizing entrepreneurship: The rise of growth equity

Abstract

Growth equity (GE) funds have emerged as the third major private equity asset class-alongside venture capital (VC) and buyout (B/O) funds-for investors, and as an important new source of external equity capital for private companies and entrepreneurs wishing to fund growth without surrendering control. GE funds have the same organizational and operational structure as VC and B/O funds, and their private-firm investments generally fall on the corporate finance spectrum between late-stage VC and buyout financing. Virtually unknown before 2000, GE funds now invest over $100 billion annually, have AUM of more than $1.1 trillion, and dry powder totaling $350 billion. Their emergence as a key corporate finance tool has allowed entrepreneurial firms to remain private much longer than in the past and in many ways GE financing has replaced going public as a source of growth capital. We define growth equity funding and trace the development of GE fund-raising and investment as described in the professional literature. We also analyze a large sample of VC, GE, and B/O funds and deals drawn from the Preqin database and show that GE shares characteristics with both VC and B/O funding but should be considered a distinct new asset class and corporate finance vehicle. We conclude by briefly describing a suggested GE research agenda. Abstract Growth equity (GE) funds have emerged as the third major private equity asset class-alongside venture capital (VC) and buyout (B/O) funds-for investors, and as an important new source of external equity capital for private companies and entrepreneurs wishing to fund growth without surrendering control. GE funds have the same organizational and operational structure as VC and B/O funds, and their private-firm investments generally fall on the corporate finance spectrum between late-stage VC and buyout financing. Virtually unknown before 2000, GE funds now invest over $100 billion annually, have AUM of more than $1.1 trillion, and dry powder totaling $350 billion. Their emergence as a key corporate finance tool has allowed entrepreneurial firms to remain private much longer than in the past and in many ways GE financing has replaced going public as a source of growth capital. We define growth equity funding and trace the development of GE fund-raising and investment as described in the professional literature. We also analyze a large sample of VC, GE, and B/O funds and deals drawn from the Preqin database and show that GE shares characteristics with both VC and B/O funding but should be considered a distinct new asset class and corporate finance vehicle. We conclude by briefly describing a suggested GE research agenda.