Growth Equity vs. Buyout Private Equity

Table of contents

  • What is Growth Equity?
  • What is a Private Equity Buyout?
  • Key Differences Between Growth Equity and Buyout
  • Conclusion

In the world of private equity investing, there are two common strategies: growth equity and private equity buyouts. While both approaches involve investing in privately held companies, there are significant differences in their focus, investment size, target company stage, and overall objectives. Understanding these differences is important for investors, entrepreneurs, business owners, and any other stakeholder who may be exposed to these investment firms.

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What is Growth Equity?

Growth equity is a type of investment strategy that targets companies with proven business models and significant growth potential. These companies have typically moved beyond the startup phase and are generating revenue, but require additional capital to accelerate their growth, expand into new markets, or develop new products and services. In many cases, these businesses (i.e., investment targets) have established unit economics and positive gross margin, but not enough operating leverage or scale to reach profitability. As a result, they are burning cash and need to raise capital in order to continue growth to eventually achieve operating leverage and profitability.

Key characteristics of growth equity investments include:

  1. Often a Minority Stake: Growth equity investors usually acquire a minority ownership position in the company, often ranging from 5% to 50%. This allows the existing management team and founders to retain control while benefiting from the investor’s resources, capital, and expertise. However, growth buyouts are also fairly common where growth equity firms invest enough capital to own a majority (e.g., 55%), but still do not own 100% of the company.
  2. Focus on Future Growth: The primary objective of growth equity is to help companies scale rapidly by providing capital and strategic guidance. Investors seek to partner with businesses that have a clear path to growth and a demonstrated ability to execute their plans. Growth equity investors are experts at identifying companies poised for future growth.
  3. Longer Investment Horizon: Growth equity investments typically have a longer hold periods compared to buyouts, often ranging from 5 to 7 years. This allows investors to support the company’s long-term growth strategy and benefit from the potential increase in valuation over time.

What is a Private Equity Buyout?

A private equity buyout is a transaction in which an investor or group of investors acquires 100% of a company. These private equity acquisitions are typically financed with a mix of debt and equity. The companies are also typically later stage, more established, and have significant cash flow to pay down debt post-investment. 

Key characteristics of buyout investments include:

  1. Majority Ownership: Private equity buyout investors usually acquire 100% of the company. This gives them the ability to make substantial changes to the business, such as replacing management, divesting non-core assets, or restructuring operations.
  2. Emphasis on Operational Improvements: Buyout investors focus on identifying companies with potential for growth and implementing strategies to improve their performance. This may involve cost-cutting measures, revenue enhancement initiatives, or strategic repositioning.
  3. Use of Leverage: Buyouts often involve a significant amount of debt financing, known as leverage. This allows investors to acquire larger companies with less equity capital, potentially amplifying returns. However, the use of leverage also increases the risk profile of the investment.

Key Differences Between Growth Equity and Buyout

  1. Investment Size: Growth equity investments are typically smaller in size compared to buyouts. Growth equity deals often range from $10 million to $100 million, while buyouts can involve investments of hundreds of millions or even billions of dollars.
  2. Company Stage: Growth equity targets companies in the expansion stage, with proven business models and significant growth potential, but a need for additional capital. Buyouts, on the other hand, often focus on more mature companies where the owners are looking for an exit.
  3. Ownership Structure: Growth equity investors often acquire minority stakes, allowing existing management and founders to retain control. Buyout investors usually acquire majority ownership, giving them the ability to make significant changes to the company’s operations and strategy.
  4. Return Drivers: Growth equity returns are primarily driven by the company’s revenue and earnings growth over the investment period. Buyout returns, in contrast, are often generated through a combination of operational improvements, debt repayment, and multiple expansion.

Conclusion

Understanding the differences between growth equity and private equity buyout strategies is essential for investors, entrepreneurs, and business owners navigating the private equity landscape. Growth equity focuses on providing capital and support to fast-growing companies, while buyouts target more mature businesses with the goal of making significant operational improvements and realizing returns through a variety of strategies.

Interviewing for Growth Equity or Venture Capital Jobs?

Practice. Practice. Practice.

There are many similarities between growth equity and VC investing, and many firms will invest in both growth stage companies as well as earlier-stage companies. Because of the overlap between these two professions, the interview process is typically very similar as well. The best way to prepare for a growth equity or VC interview is to spend ample time preparing. First, you will need to nail down your understanding of the interview process itself and what to prepare for. Then you will need to ensure you have an in-depth understanding of the investment process, technical aspects (e.g., deal structures), and responsibilities of an investor. Next, you will need to learn how to analyze a business from an investors perspective including financial modeling, returns modeling, and business diligence. Finally, you will need to work on your ability to present your findings in a clear, concise, and confident manner. 

Leverage our free resources or complete VC & Growth Equity interview guides to help you prepare for all of these items.

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