GROWING WITH GROWTH EQUITY

INSEAD’s center for Private Equity – GPEI for short – is the first stop for PE industry players looking to connect with our school. We wanted to give the center’s fast growing community a chance to interact & engage with us on a regular basis – so welcome to our new PE Blog!

When it comes to transparency, clarity and access to information, the lords of Private Equity (PE) excel as masters of the opaque. Complete transparency, a potential competitive handicap of the public company, is not required of the unlisted. Both the equity and the information related to it are indeed PRIVATE!

The recipe for Growth Equity investing takes a dollop of the aforementioned opaqueness, stirs in the uncertain environment of an emerging market and then seasons liberally with entrepreneurs and investee companies who are unlikely to entertain the mere suggestion of surrendering a majority stake in their firms. The result is a potentially explosive mix. An acquired taste undoubtedly. - Welcome to the world of Growth Equity.
The industry defines growth equity as (often significant) minority equity investments made by institutional PE investors or GPs (General Partners) in established and fast growing companies for the purpose of business expansion into new markets, new products or acquisitions.

Well over 70% of the private equity deals executed over the past 15 years in emerging markets fall into the category of Growth Equity, yet a high level of uncertainty persists and surprises even the most experienced players – both GPs and LPs alike.

Given INSEAD’s entrepreneurial DNA, we regularly engage with a close network of family enterprises; given our global campus locations, those firms are most likely located in one of the up and coming emerging markets and we often hear the following questions: Is Private Equity a source of funding worthwhile considering? What are the pros and cons? How do I get it right? (… or rather are those PE investors “good guys” or “bad guys”.)

Clearly none of those entrepreneurs is thinking of selling their business outright, so they are de facto talking about Growth Equity, i.e. financial injections in return for a minority equity stake in their enterprise.

At this point it might be worthwhile clarifying how to differentiate Growth Equity from Venture Capital & Buy-out funds.

Those targeted portfolio firms - often family owned - have to date grown organically without any external funding, are EBITDA positive and are expected to achieve strong future revenue growth. So the firms are not at an experimental stage nor are they necessarily involved in high-tech. – That’s how we differentiate Growth from late-stage Venture.

Even though the PE firms are merely minority shareholders in the company, they are active investors who bring sector expertise and overall business experience to the table. Therefore Growth Equity funds are often referred to as smart money or “money PLUS”, whereby the “PLUS” can vary significantly from fund to fund and depends very much on the team behind the GP; but it refers in general to deep industry expertise, a large rolodex of connections and experience when expanding into new markets.

To be clear, growth equity investors focus on fast growing yet established firms with a proven track record and business model; unlike Venture Capital funds, they will not consider early-stage companies.

As a minority investor, Growth equity funds look for alignment of interest with the entrepreneur from the start; the success of their investment is 100% dependent on the success of the business they invested in, not on sophisticated financial engineering and restructuring. Leverage is not applied - a major difference to Buy-out funds.

In reply to regular questions from entrepreneurs and family businesses on the value-add of a Growth Equity partner we recently wrote a brief working paper which addresses the question from entrepreneurs: How do I get it right?

In one of our recent round tables held on campus, a CEO asked about the “secret sauce” of PE investors – or what makes them consistently so successful – and the GP replied “Bloody hard work”.

Clearly, the right PE investor will add more than funding – he will open doors & bring in business expertise and improve on processes and operations. But most of all, they will improve the corporate governance structure, starting with a focused, effective & professional board and ensuring a business foundation that supports future growth.

It might be advisable to think of those Growth Equity Funds as corporate governance accelerators with some cash injection.