Media / Investor Relations
Hess Group International Address:
J/F Kennedy Street 6 3106 Limassol, Cyprus
December 16th, 2020
What is growth equity
Venture capital firms usually invest in early-stage companies, but growth equity funds are the ones investing in fast-growing businesses which have moved way beyond the start-up stage, in exchange for a minority equity stake. As one can imagine, investing in a fast-growing has its drawbacks such as lack of control, so a trust-based relationship between investors, existing owners and management is needed in order to advance the company to a new stage of development as shown below
As mentioned above growth equity investments are usually made in exchange for minority equity stakes, where the investors have no right to control the company. Very rarely will a growth equity deal result in the PE firm obtaining more than 50% of the business and benefiting from having the majority shareholder rights. The minority equity position of a PE firm will shape the aspects of the investment process; deal structuring, course of action at the exit phase etc. So, it is very important for minority investors to understand the majority shareholders and make sure that their ideas meet halfway. Each group should be focused on an agreed-upon plan as well as be able to execute certain changes when necessary.
Ideally, owners, existing managers and new investors will form a professional relationship and offer their specific skills in order to take the company to a new level. Growth equity investors bring investment and experience in capital structures, buying/selling businesses and their knowledge about capital markets and initial public offering processes. Commonly they also have connections in commercial and financial circles which they use in order to excel a company. The economic interest of both parties should be well aligned, moreover, since the PE firm is investing in a fast-growing business, it is beneficial to keep the existing management in place, as they possess knowledge of the operating business and its markets. The investment will therefore not be disruptive to the operating dynamics.
Another concept to keep in mind in order to ensure a good working relationship is to agree on specific targets from the beginning. A clear understanding of the culture and business approach from both sides will help set realistic goals. These relationships play a critical role, as an example, a hands-on investor is usually advised not to invest in a family business, the same way a passive partner would not be a good choice for a business that needs restructuring.
The capital invested is typically used to fund specific projects at the portfolio company which is defined by a bench of partners. Setting international expansion plans, developing new products, expanding facilities can also be achieved by using growth equity funds.
In summa, a growth equity funds invest in companies with a proven business model and a bright future. The funds are needed in order to unlock the full potential of a portfolio company, improve their profitability and accelerate their growth.
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Media / Investor Relations
Hess Group International
Address: J/F Kennedy Street 6
3106 Limassol, Cyprus