Growth Buyout Investing Opportunities and Trends

Growth buyout investing is a popular strategy among private equity firms and investors. Growth buyouts involve acquiring a company with high growth potential, often with a significant amount of debt.

Investors can target companies with strong management teams, innovative products, or services with a high growth trajectory. This strategy is often used to capitalize on emerging trends and technologies.

The growth buyout market has seen significant growth in recent years, with a notable increase in deal volumes and values. For instance, in 2020, global growth buyout deal value reached $143 billion.

Investors can also look for companies with a strong competitive advantage, such as a unique business model or a dominant market position.

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The growth buyout model has a long history, dating back to the 1960s when private equity firm TA Associates first pursued a mixture of early stage and high-growth investments.

Growth buyouts have been observed to correlate with increased employment and employee commitment, due to an increased focus on human resource management intended to drive growth.

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TA Associates shifted its focus exclusively to growth buyouts in the 1980s, marking a significant shift in the firm's investment strategy.

Thomas H. Lee Partners acquired Hills Department Store through a growth buyout in 1985, after which the company's sales, operating profit, and number of employees grew significantly.

The firm also acquired J. Baker, Inc. through a growth buyout that same year, increasing its number of stores and licensed sales.

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Private equity is a broad term that describes a collection of unique strategies, such as venture capital, buyout, growth equity, fund-of-funds, and secondaries. These strategies provide financing to non-public companies or help scale established businesses.

Private equity investments can be divided into public and private markets, with private investments involving financing non-public companies in negotiated transactions. The five most common private-market asset classes are private equity, private debt, real estate, infrastructure, and natural resources.

The types of private equity investments include venture capital, which provides capital to new or growing businesses, and buyout, which invests in established companies to improve operations and/or financials. Venture capital target companies are high growth but unprofitable, while buyout target companies are profitable with stable reoccurring revenue but have more moderate growth.

Here are the five most common private equity strategies:

Each strategy has its own risk-return profile, with early-stage venture capital bearing high operational risk, late-stage growth facing valuation risk, and buyout strategy vulnerable to financial risk due to leverage.

H.I.G. Capital, a global private equity firm, has closed its latest equity fund with a whopping $970 million in commitments. This significant milestone marks a major achievement for the company.

The fund, which is a testament to H.I.G.'s growing reputation in the industry, is expected to be used for various investments in the coming years.

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Great Point Partners is a leading health care investment firm founded in 2003 and based in Greenwich, CT, with 30 professionals investing in the United States, Canada, and Western Europe.

The firm has a proactive and proprietary approach to sourcing investments and tuck-in acquisitions for its portfolio companies, investing across all sectors of the health care industry with a particular emphasis on biopharmaceutical services and supplies, alternate site care, medical device, and information technology enabled businesses.

Great Point Partners has provided growth equity, growth recapitalization, and management buyout financing to more than 200 growing health care companies, managing $1.7B of capital in its private funds and public life sciences equity strategy.

The firm's private equity funds are closed-end funds, not accepting any new investors, and the net multiple on realized and unrealized investments of the private equity funds is 2.3x as of December 31, 2021, calculated after accounting for management fees, carried interest, and all fund expenses.

Private equity opportunities are diverse and can be categorized into different strategies. Venture capital invests in high-growth, unprofitable companies, while buyout funds target profitable companies with steady cash flows.

The venture capital opportunity set is further divided into seed-stage, early-stage, growth-stage, and late-stage growth. Seed-stage companies require financing to research business ideas, develop prototype products, or conduct market research. Early-stage companies have well-articulated business and marketing plans but are pre-revenue.

Growth-stage companies have started their selling efforts and need capital to expand production capacity, product development, and/or fund working capital. Late-stage growth companies typically have a product or service that has achieved relative maturity and are raising additional capital to fuel further expansion or accelerate growth before a liquidity event.

Buyout funds, on the other hand, typically invest in profitable companies with steady cash flows that can bear leverage. These funds target companies to which they believe they can add value through operational improvement, cost cutting, M&A, leadership changes, and/or financial engineering.

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Here's a brief overview of the different private equity strategies:

These strategies can provide important diversification benefits and help "derisk" a portfolio. By allocating to private equity, investors can potentially achieve higher returns and reduce their reliance on public markets.

Investing in growth buyouts can be a lucrative opportunity for investors looking to tap into the potential of established and mature companies. Growth equity provides financing to these companies in exchange for equity, usually a minority stake, to help scale, expand into new markets, and/or improve operations.

Growth equity is a type of private equity investment that focuses on established and mature companies. It's an attractive option for investors seeking stable returns with moderate risk. The typical characteristics of companies that growth equity invests in are profitable with stable recurring revenue and more moderate growth.

Investors in growth equity may realize significant returns by working in partnership with established companies that have proven themselves to be profitable, with strong potential for future success. However, private equity investments are high risk and speculative, with no guarantee of returns, and investors should not invest unless they are prepared to lose all of their money.

Here are some key characteristics of growth equity investments:

Investing in growth buyouts can be a smart move for those looking to diversify their portfolios. Growth capital is attractive to investors because it allows them to work with established businesses that have a proven track record and clear plans for growth.

Growth capital can provide significant returns for investors who partner with profitable companies that have strong potential for future success. Connection Capital takes an alternative approach by raising capital from private individual clients to invest in UK SMEs.

Private equity investments are high-risk and speculative, so investors should be prepared to lose all their money. Past performance is not a reliable indicator of future performance, and private equity investments are illiquid.

Investors can allocate to buyout as a core holding due to its moderate risk level and relatively stable returns. This strategy is often combined with early-stage venture capital and late-stage growth to improve exposure and diversification.

The combination of these strategies allows investors to allocate across a business's life cycle, which can improve diversification and reduce correlation with public market downturns. Historically, private equity investments have not been as correlated to public market downturns.

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Experts in the field of growth buyouts often cite the example of Microsoft's acquisition of LinkedIn in 2016, a deal that valued the social media platform at $26.2 billion. This deal was a prime example of a growth buyout, where a larger company acquires a smaller, high-growth business to expand its market share and capabilities.

Many experts agree that growth buyouts are a key strategy for companies looking to accelerate their growth and increase their market share. In fact, a study found that companies that engage in growth buyouts tend to outperform their peers over the long term.

The success of growth buyouts depends on various factors, including the quality of the target business, the strategic fit with the acquiring company, and the ability of the acquiring company to integrate the target business effectively. As one expert noted, "A growth buyout is only successful if the acquiring company can unlock the growth potential of the target business."

Growth buyouts often target profitable portfolio companies in industries with a high potential for growth.

These acquisitions are financed through a combination of debt and equity, making them a highly growth-oriented form of private equity strategy.

The holding company in growth buyout transactions seeks to create revenue growth in the portfolio company by expanding market share.

Typically, this market growth is achieved through strategies like acquisitions and the expansion of product lines and distribution.

During a growth buyout, the holding company often acquires a large stake or even a controlling interest in the portfolio company.

These buyouts carry a certain amount of risk, as they rely upon the expectation of continued growth in the portfolio company.

In order to be successful, they require operational expertise and the ability to structure financing and acquisitions.

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