Finance:Growth capital

Short description: Type of private equity investment

Growth capital (also called expansion capital and growth equity) is a type of private equity investment, usually a minority interest, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a significant acquisition without a change of control of the business.

Companies that seek growth capital will often do so to finance a transformational event in their lifecycle. These companies are likely to be more mature than venture capital funded companies, able to generate revenue and profit but unable to generate sufficient cash to fund major expansions, acquisitions or other investments. Because of this lack of scale, these companies generally can find few alternative conduits to secure capital for growth, so access to growth equity can be critical to pursue necessary facility expansion, sales and marketing initiatives, equipment purchases, and new product development.

Growth capital can also be used to effect a restructuring of a company's balance sheet, particularly to reduce the amount of leverage (or debt) the company has on its balance sheet.

Growth capital is often structured as preferred equity, although certain investors will use various hybrid securities that include a contractual return (i.e., interest payments) in addition to an ownership interest in the company. Often, companies that seek growth capital investments are not good candidates to borrow additional debt, either because of the stability of the company's earnings or because of its existing debt levels.

Providers

Growth capital resides at the intersection of private equity and venture capital and as such growth capital is provided by a variety of sources. The types of investors that provide growth capital to companies span a variety of both equity and debt sources, including private equity and late-stage venture capital funds, family offices, sovereign wealth funds, hedge funds, Business Development Companies (BDC), and mezzanine funds. Growth capital investments are also made by more traditional buyout firms. Particularly in markets where debt is less available to finance leveraged buyouts or where competition to fund startup businesses is intense, growth capital becomes an attractive alternative.

Investing approach

Growth equity investments, as defined by the National Venture Capital Association, feature the following:

• Company's revenues are growing rapidly.
• Company is cash flow positive, profitable or approaching profitability.
• Company may be founder-owned and often has no prior institutional investment.
• Investor is agnostic about control and purchases minority ownership positions more often than not.
• Industry investment mix is similar to that of venture capital investors.
• Capital is used for company needs or shareholder liquidity and additional financing rounds are not usually expected until exit.
• Investments are unlevered or use light leverage at purchase.
• Investment returns are primarily a function of growth, not leverage.

See also

• Convertible bond
• Mezzanine capital
• Working capital

External links

• Bridging the finance gap: next steps in improving access to growth capital for small businesses. HM Treasury, December 2003.
• "What is Growth Capital?", Industry Canada

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• Buyout
• Venture
• Mezzanine
• Growth
• Secondaries
• Equity co-investment

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• History of private equity and venture capital
• Early history of private equity
• Private equity in the 1980s
• Private equity in the 1990s
• Private equity in the 2000s

| group3 = Terms and concepts

| list3 =

Buyout	Financial sponsor Management buyout Divisional buyout Buy–sell agreement Leveraged recapitalization Dividend recapitalization
Venture	Angel investor Business incubator Post-money valuation Pre-money valuation Seed money Startup company Venture capital financing Venture debt Venture round
Structure	Private equity firms and funds Limited partnership Limited liability company Carried interest Management fee Publicly traded private equity Business Development Company Venture capital trust Private investment in public equity (PIPE) Pledge fund

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• Corporations
• Institutional investors
• Pension funds
• Insurance companies
• Fund of funds
• Endowments
• Foundations
• Investment banks
• Merchant banks
• Commercial banks
• High-net-worth individuals
• Family offices
• Sovereign wealth funds
• Crowdfunding

| group5 = Related financial terms | list5 =

• AUM
• Cap table
• Capital call
• Capital commitment
• Capital structure
• Distribution waterfall
• EBITDA
• Envy ratio
• High-yield debt
• IPO
• IRR
• Leverage
• Liquidation preference
• M&A
• PME
• Taxation of private equity and hedge funds
• Undercapitalization
• Vintage year

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• Private equity and venture capital investors
• Private equity firms
• Venture capital firms
• Angel investors
• Portfolio companies

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