Report

Growth Equity: A Risk/Return Profile That’s Hard to Ignore

PE firms can achieve impressive performance without the need for heavy leverage.

Hugh MacArthur, Rebecca Burack, Christophe De Vusser, Kiki Yang, and Brenda Rainey

First published on февраля 25, 2019
min read


This article is part of Bain’s 2019 Global Private Equity* Report. Explore the contents of the report here or download the PDF to read the full report.* Growth equity is on a tear. Since 2014, $367 billion has been raised globally for the strategy, much of it by traditional buyout firms. For some firms, this is a return to their roots. While they started out raising funds that felt much closer to growth equity, they grew through the current cycle to find themselves concentrated mostly in the big buyout space. Raising a fund focused on fast-growing companies takes them back to where they started. For other buyout firms, growth equity represents a true adjacency expansion. They recognize that these funds aren’t much of a stretch from their core capabilities and strengths. The investment straddles the space between buyout, which focuses on companies with years of proven cash flow and profitability, and venture capital, which invests in start-ups that are still developing products and persuading early adopters. The target companies have typically reached an inflection point and need capital to scale an already proven business model. The appeal for investors is the risk/return profile, which is closer to buyout than to venture. While venture capital holds the potential for huge wins, it also risks big losses for investors that make the gamble. Growth equity, on the other hand, is less risky and offers buyout-like performance, without the need for heavy leverage to magnify returns. A look at the distribution of deal returns, as tracked by the State Street Global Exchange Private Equity Index, shows that growth equity performance is very close to that of buyout funds, with much lower rates of capital impairment than venture capital (see figure). Figure Growth equity’s distribution of returns is similar to that of buyouts This article is part of Bain’s 2019 Global Private Equity* Report. Explore the contents of the report here or download the PDF to read the full report.* Insights in Your Inbox Get Our Latest Private Equity Insights Receive Bain’s landmark Global Private Equity Report each February, plus the latest insights and developments in private equity throughout the year.

This article is part of Bain’s 2019 Global Private Equity Report. Explore the contents of the report here or download the PDF to read the full report.

Growth equity is on a tear. Since 2014, $367 billion has been raised globally for the strategy, much of it by traditional buyout firms. For some firms, this is a return to their roots. While they started out raising funds that felt much closer to growth equity, they grew through the current cycle to find themselves concentrated mostly in the big buyout space. Raising a fund focused on fast-growing companies takes them back to where they started. For other buyout firms, growth equity represents a true adjacency expansion. They recognize that these funds aren’t much of a stretch from their core capabilities and strengths.

The investment straddles the space between buyout, which focuses on companies with years of proven cash flow and profitability, and venture capital, which invests in start-ups that are still developing products and persuading early adopters. The target companies have typically reached an inflection point and need capital to scale an already proven business model.

The appeal for investors is the risk/return profile, which is closer to buyout than to venture. While venture capital holds the potential for huge wins, it also risks big losses for investors that make the gamble. Growth equity, on the other hand, is less risky and offers buyout-like performance, without the need for heavy leverage to magnify returns.

A look at the distribution of deal returns, as tracked by the State Street Global Exchange Private Equity Index, shows that growth equity performance is very close to that of buyout funds, with much lower rates of capital impairment than venture capital (see figure).

Growth equity’s distribution of returns is similar to that of buyouts

This article is part of Bain’s 2019 Global Private Equity Report. Explore the contents of the report here or download the PDF to read the full report.