I’ve aggregated the thoughts below from my own experience in growth equity as well as with the thoughts of many of our OfficeHours Growth Equity Coaches. In no way does this article nor anything I post reflect views of my past employers.
Views are simply my own.
What is Growth Equity:
If Private Equity = financial engineering and Venture Capital = macro industry analysis and networking your way into deals, growth equity is right up the middle.
At most shops, there’s an element of sourcing — whether it be through thesis-driven projects or simply cold calling companies and then an element of performing diligence on companies with the hope of a deal closing and that deal being a part of your firm’s portfolio.
Thesis-driven projects: Baby boomers still make up over 20% of the US population hence there will be a continuous need for home health and home care facilities going forward. Digital security will be prioritized as more and more people continue to work from home and eventually pursue a hybrid work situation. Having a pet at home isn’t just a COVID-19 fad.
The concept here is that firms will piggyback off a macro industry trend that will support the growth of the space and hence the growth of a market-leading asset in the space (your beachhead). Lots of reading, researching leads to various growth equity firms getting smart and gaining knowledge in various verticals — but getting smart is only the beginning of the battle.
Sourcing: No doubt it’s important to know what you’re looking for (as mentioned above). But once you build out a market landscape around a specific space, then you have to start calling the companies within. Your job is to engage with bankers who cover those industries to see if there’s anything in-market or coming to market soon. If deals are in-market, there’s a likelihood that you’re not the only growth equity firm thinking about this strategy.
- Call all the companies in the space — large and small (potential add-ons and tuck-ins which will come to use later)
- Identify & engage with the market leader (likely the one with the best technology/largest foothold in the market from a revenue/tenure perspective)
- Convince them to do a deal at a valuation lower than what they’d get by going through an investment bank
- Convince them that you’re the partner they should choose (because of your work in the space, your experience, XYZ other portfolio company that you really did well with that has similar tailwinds) INSTEAD of the other 10-15 growth equity firms also offering them $25mm bags of cash (assume here that many of the most coveted businesses are cash-flowing so cash is less glamorous when someone already has a lot of it).
- Convince them on the fact that working with you will help not only their organic growth strategy but also their inorganic growth strategy (because you have add-on ideas for their platform). Add various products to create a solution set, i.e. UberEats/UberFreight all are on the Uber Platform.
- Diligence, convince your partners, take it to IC, close the deal, wire the money.
Sounds easy enough?
Execution: This is where things get exciting because between Step 5 & 6 there’s a lot that I’m leaving out from the initial “we like this business” to their logo going on your firm’s portfolio page. Most shops aren’t doing deals THAT OFTEN because it’s simply a hunting game.
When you move to the development side (investing side) as an investment professional, you become a long-term thinker thinking about the land, property, asset, tailwinds, macro analysis, micro strategies, potential add-ons, competition, strategic outcomes, etc.
There are going to be plenty of times when you’re on a live transaction but have to cater to your intro sourcing calls (because you spent time last week setting them up and it doesn’t look good to cancel on CEOs). Deal work might get pushed to early AM or late evening once you finish up those afternoon sourcing calls. Then you’re diving into the data room only to find 5 CIM’s printed on your desk to which you owe responses on for why or why not it makes sense to pursue (both to the bankers and to your team). All said and done, you just found out that you’re not the only firm around the table trying to woo this CEO but your major competitor is as well (oh and they just raised a larger fund in this bullish environment so they can pay a higher multiple…).
Again, it’s easy if you’re passionate about finding and hunting for companies and then seeing them from the very initial days of ‘start’ to ‘close’ — but it doesn’t come without its fair share of frustrations.