Growth capital (also called expansion capital and growth equity) is a type of
private equity
In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a t ...
investment, usually a
minority investment, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a significant acquisition without a change of control of the business.
Companies that seek growth capital will often do so to finance a transformational event in their lifecycle. These companies are likely to be more mature than
venture capital
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to start-up company, startups, early-stage, and emerging companies that have been deemed to have high growth poten ...
funded companies, able to generate revenue and profit but unable to generate sufficient cash to fund major expansions, acquisitions or other investments. Because of this lack of scale, these companies generally can find few
alternative conduits to secure capital for growth, so access to growth equity can be critical to pursue necessary facility expansion, sales and marketing initiatives, equipment purchases, and
new product development
In business and engineering, new product development (NPD) covers the complete process of bringing a new product to market, renewing an existing product or introducing a product in a new market. A central aspect of NPD is product design, along ...
.
Growth capital can also be used to effect a restructuring of a company's balance sheet, particularly to reduce the amount of
leverage (or debt) the company has on its
balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a Partnersh ...
.
Growth capital is often structured as
preferred equity, although certain investors will use various
hybrid securities that include a contractual return (i.e., interest payments) in addition to an ownership interest in the company. Often, companies that seek growth capital investments are not good candidates to borrow additional
debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
, either because of the stability of the company's earnings or because of its existing debt levels.
Providers
Growth capital resides at the intersection of
private equity
In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a t ...
and
venture capital
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to start-up company, startups, early-stage, and emerging companies that have been deemed to have high growth poten ...
and as such growth capital is provided by a variety of sources. The types of investors that provide growth capital to companies span a variety of both equity and debt sources, including private equity and late-stage venture capital funds,
family offices, sovereign wealth funds, hedge funds,
Business Development Companies (BDC), and mezzanine funds. Growth capital investments are also made by more traditional
buyout firms. Particularly in markets where debt is less available to finance
leveraged buyout
A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money ( leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loa ...
s or where competition to fund startup businesses is intense, growth capital becomes an attractive alternative.
Investing approach
Growth equity investments, as defined by the National Venture Capital Association, feature the following:
* Company’s revenues are growing rapidly.
* Company is cash flow positive, profitable or approaching profitability.
* Company may be founder-owned and often has no prior institutional investment.
* Investor is agnostic about control and purchases minority ownership positions more often than not.
* Industry investment mix is similar to that of venture capital investors.
* Capital is used for company needs or shareholder liquidity and additional financing rounds are not usually expected until exit.
* Investments are unlevered or use light leverage at purchase.
* Investment returns are primarily a function of growth, not leverage.
See also
*
Convertible bond
*
Mezzanine capital
*
Working capital
Working capital (WC) is a financial metric which represents operating liquidity available to a business, organisation, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is consi ...
References
External links
Bridging the finance gap: next steps in improving access to growth capital for small businesses HM Treasury, December 2003.
"What is Growth Capital?", Industry Canada
{{Private equity and venture capital
Private equity
Business terms