Growth Capital
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Growth capital (also called expansion capital and growth equity) is a type of
private equity Private equity (PE) is stock in a private company that does not offer stock to the general public; instead it is offered to specialized investment funds and limited partnerships that take an active role in the management and structuring of the co ...
investment, usually a
minority interest In accounting, minority interest (or non-controlling interest) is the portion of a subsidiary corporation's stock that is not owned by the parent corporation. The magnitude of the minority interest in the subsidiary company is generally less than ...
, 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 are often small, rapidly growing, and their assets are often intangible. They 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 (VC) is a form of private equity financing provided by firms or funds to start-up company, startup, early-stage, and emerging companies, that have been deemed to have high growth potential or that have demonstrated high growth in ...
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 New product development (NPD) or product development in business and engineering covers the complete process of launching a new product to the market. Product development also includes the renewal of an existing product and introducing a product ...
. 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 business ...
. 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 Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...
, 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 Private equity (PE) is stock in a private company that does not offer stock to the general public; instead it is offered to specialized investment funds and limited partnerships that take an active role in the management and structuring of the co ...
and
venture capital Venture capital (VC) is a form of private equity financing provided by firms or funds to start-up company, startup, early-stage, and emerging companies, that have been deemed to have high growth potential or that have demonstrated high growth in ...
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 office A family office is a privately held company that handles investment management and wealth management for a wealthy family, generally one with at least $50–100 million in investable assets, with the goal being to effectively grow and transfer ...
s, 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 the acquisition of a company using a significant proportion of borrowed money (Leverage (finance), leverage) to fund the acquisition with the remainder of the purchase price funded with private equity. The assets of t ...
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 In finance, a convertible bond, convertible note, or convertible debt (or a convertible debenture if it has a maturity of greater than 10 years) is a type of bond that the holder can convert into a specified number of shares of common stock in ...
*
Mezzanine capital Mezzanine capital is a type of financing that sits between senior debt and equity in a company's capital structure. It is typically used to fund growth, acquisitions, or buyouts. Technically, mezzanine capital can be either a debt or equity ins ...
* Working capital * Growth buyout


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