What is Growth Equity? A Beginner's Guide to Breaking in the Industry

rareliquid

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TPG GrowthThe Software Report

Most people have heard of venture capital and private equity firms that work on LBOs, but not many know about growth equity because it’s kind of the unloved middle child that doesn’t get enough attention. But today, I’m going to give it that attention and hopefully you will too because it’s actually one of the most interesting career paths in the finance buy-side world.

I’ll first be going into what growth equity is, I’ll then cover some of the top funds in the space, the day to day responsibilities, then go into hierarchy and compensation, and lastly help you figure out if growth equity is for you by going through pros and cons.

What is Growth Equity?

Going back to our middle child analogy, you can think of venture capital as the youngest kid who gets all the love and attention since in VC you invest in the hottest and sexiest companies. Private equity buyout firms are the responsible oldest child since in PE you invest in more mature and honestly more boring companies with stable predictable cash flows.

And then growth equity is the middle child that doesn’t get enough attention because they fly a bit under the radar and acts as a bridge between venture and buyout firms. Here’s also another way to look at these three industries by comparing to the typical business life cycle framework and as you can see, growth equity investments come right at the sweet spot when companies are ramping up from the venture phase but are not yet mature. More specifically, growth equity investments come at the time when the risk associated with a company shifts from whether or not it can achieve product-market fit to whether or not it can become a profitable.

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Growth Stages of a CompanyCapital Advisors

The capital from growth equity investors are then used to help a company get to the next level by expanding operations, entering new markets, making strategic acquisitions, and much more. As you may have already deduced yourself, because growth equity firms invest in the later stages of the business cycle, the risk of each investment is much lower than in venture capital but it also means your returns are not as multiplicative as well.

Building off of that, growth equity investments also provide a much steadier return stream than venture capital which by the way you can learn more about in this video right here. Adding in a few more points, growth equity firms invest minority equity positions, invest in companies with limited or no free cash flow, don’t use much if any debt for financing, and investment risks mainly focus on execution and management. Lastly, what’s important to know is that a growth equity firm’s main goal with its investments is eventually to reach an exit either through an IPO, sale of the company, or sale of shares to other investors.

The Top Funds

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Top Growth Equity Fundsgrowthcapadvisory.com.

One important note before I go into the funds is that the term private equity is a broad term that actually covers venture capital, growth equity, and buyout firms, but people mainly tend to call buyout firms private equity while for VC and growth equity you don’t typically say you work in PE.

A lot of firms have various funds with different strategies that invest in the venture, growth, and buyout stages and here is a snapshot of some of the top growth equity firms ranked from left to right according to growthcapadvisory.com. The rankings for the firms are not super concrete and there are a lot of firms left out that still offer really great experiences.

Day to Day Responsibilities

One of the most important responsibilities of a growth equity investor involves sourcing new potential investments, which can include sending a bunch of outbound emails, receiving warm intros, attending conferences, and just a whole lot of networking. To add onto this, oftentimes a more senior investor will come up with an investment theme and the junior employee will be responsible for compiling a list of companies and then reaching out to them.

Another important responsibility involves conducting due diligence on potential investments, with the ultimate goal of seeing if an investment will meet the fund’s returns threshold. A lot of analysis is focused on estimating if the market share can be attained, the pace of growth at which the company should be expanding, the amount of capital required to fund the growth, and the viability of long-term exit strategies.

All of this can include customer, management, and KOL calls, valuation work on excel, reading many many industry reports, building investment memos, and much more. Growth equity investors also spend a lot of time supporting portfolio companies which can mean joining boards to provide insight, helping with market expansion and customer cohort analysis, introducing companies to key relationships with customers, suppliers, or new hires, and helping out with the M&A or IPO process.

As you grow more senior fundraising also becomes a large responsibility and so not only are you an investor, but you also start to manage investors by providing regular portfolio updates, checking in with them every so often, and reaching out when new funds are being raised

Hierarchy and Compensation

The hierarchy in growth equity is fairly similar across firms and usually start off at the associate level but there can also be an analyst level for those who enter straight out of college, then you have Vice Presidents, Principals, and then Managing Directors or Partners. Moving onto compensation, I do have to add the caveat that it depends widely depending on the firm you join and there isn’t that much data out there so keep that in mind. On the analyst level which is straight out of college, you can expect to make about $100K in salary and likely little to no carry which is a percentage of the fund’s overall profits. Then for associates, which is usually a few years out of college, you can expect to make about $150K in salary, $67K in bonus, and carry at some firms so I’d say around $200K to $300K. At the senior associate level, your base is around $175K, you get a bonus of $100K, and are much more likely to get carry so you can expect total comp of around $300K to $500K. Next up for Vice Presidents and Principals, this is where compensation is super variable, but based on the data we have, salaries are around $270K with bonuses of $125K and almost everyone gets carry at this stage, so your total compensation is probably around $500K to well over a million depending on how long you’ve been with the firm.

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Analyst Growth Equity Compensationrareliquid

The Pros and Cons of Growth Equity

Pros

  1. Starting with the pros, the first is that you get to work with companies in the middle of their business cycles and so if you think you’ll enjoy analyzing a company’s business model, diving into its unit economics, and focusing on expansion, then growth equity is for you
  2. Second, you’re constantly getting exposure to top level management teams who are in the middle of shaping an industry which results in a ton of personal and professional growth
  3. Lastly, if you straddle between being a risk-taker and being risk-averse, growth equity is in that sweet spot between VC and buyout funds where you get the best of both worlds in terms of risk and returns

Cons

  1. Moving to the cons, the first is that because you’re investing a minority interest, you don’t have a lot of control and lean heavily on the management team’s ability to execute which can also be a pro if you don’t want hands-on operational experience
  2. Second, because growth equity funds invest in companies with proven product market fit, they’re a little more obvious investments compared to VC and there can be a ton of competition fighting for the same deals though this is generally true for most of the buy side
  3. Lastly, if you enjoy routine and structured work schedules, then growth equity is probably not for you because things are changing all the time and rarely are two days ever the same

Follow and stay tuned for more videos and articles if you want a career in finance!

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Ex-JPM Investment Banker making content about finance careers and markets.

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