Many successful businesses reach a stage where their products, services, and business models are considered profitable, yet they need extra funds to scale further. At this point, securing the right kind of investment becomes crucial to support expansion or accelerate growth. This is where growth equity comes into play. Positioned between venture capital and traditional private equity, growth equity typically targets mature companies with profitable business models that need capital injection to accelerate expansion. For investors, it represents an opportunity to support firms that are no longer in the earliest, riskiest stages but still offer high potential for value creation. We will explore growth equity as an investment form and how it works to support sustainable expansion.

What is Growth Equity?

Growth equity is a type of private equity investment fund focused on providing capital for established companies with proven business models that are looking to expand. The companies targeted by growth equity are also more mature than early-stage startups and often already profitable or close to profitability. It involves investing in minority stakes in companies that need capital injection to scale their operations, enter new markets, or accelerate business growth. An exit strategy for growth equity funds typically involves selling to another private equity fund, a share buyback, or an IPO for larger companies.

Key Characteristics of Growth Equity

Growth equity investment helps businesses to scale faster and smarter. Several characteristics define growth equity as a powerful driver of long-term success:

• Minority Ownership Stakes: Growth equity investors typically take a minority stake (20–40% ownership) in the target company rather than buying a majority stake. The existing founders and management often stay to manage daily operations. The investors often pursue protective provisions and sit on the company’s Board of Directors to maintain influence over decision-making.

• Expansion Capital: Growth equity usually targets mature companies with proven business models. These companies have passed the startup stage with high growth potential, but they need additional capital for business growth. This includes tapping into new markets, developing new products, or scaling up teams.

• Little to No Debt Used: Compared to leveraged buyouts, growth equity investments are generally financed with equity rather than debt. The investors inject capital into the company, with the capital often going to the company’s balance sheet for growth projects.

• Return Strategy: Growth equity investors make money when the company’s business value increases dramatically as it scales up. They target high returns driven by rapid revenue and earnings growth in the business.

The Differences Between Growth Equity VS Private Equity

Both growth equity and private equity are investment strategies that involve investing capital into companies. However, they differ significantly in their target companies, investment styles, and involvement. Growth equity targets relatively mature companies that are still in a high-growth phase, aiming to provide capital to boost further expansion. These investments involve minority stakes in companies with proven business models but need funds to scale operations. Growth equity investors tend to avoid high leverage, preferring to use equity financing with less debt. They usually allow existing management teams to remain in operational control while providing strategic support to accelerate growth.On the other hand, private equity targets more mature companies that may be underperforming or require restructuring to increase profitability. Private equity firms acquire majority or full ownership stakes, frequently using a leveraged buyout. This ownership allows private equity firms to exert substantial control over governance and operations, including replacing management teams if needed, to improve operational efficiency and increase company value.Read More: Private Equity Explained: Key to Unlock Growth and Innovation

How Does Growth Equity Work?

Here is the general process of how growth equity works:

Deal Sourcing and Evaluation

In this stage, investors will identify companies with proven business models and high growth potential that need capital injection to scale. These companies are past the early-stage startup phase and have already achieved some traction and revenue, but need extra funding to expand further.

Due Diligence

After selecting a target company, investors conduct comprehensive due diligence. This involves assessing its financial health, market opportunity, competitive landscape, and management quality. Ideal candidates should have enough cash flow to support growth and not require capital just to survive.

Deal Negotiation and Structuring

Next, terms of the investment are negotiated, including capital amount, ownership percentage (usually minority stakes), and conditions like board representation, anti-dilution protection, and liquidation preferences.

Investment and Monitoring

Once investment deals are done, growth equity investors actively support the company by providing support. It can be strategic guidance, business development assistance, and sometimes additional capital in future rounds. They work closely with the management to help scale the business.

Exit Strategy

After 5–7 years, investors plan to exit through methods such as selling shares to new investors, a strategic buyer, an initial public offering (IPO), or a management buyout, aiming for a substantial return on their investment.Read More: Exit Strategy: Planning for Your Business’s Future Transition

Phintraco Natha Kapital: Investing in Your Potential, Driving Your Success

Are you thinking of upgrading your business to the next level? You need to secure funds and find the right partner who understands your vision and supports your business journey. Phintraco Natha Kapital was established in 2020 as an investment firm with that purpose in mind. We provide not only capital but also advisory support and access to a strong network to help businesses take their next big step. Our investments cover a wide range of sectors, from ICT and property to manufacturing and education, with a special focus on technology-driven companies. What sets us apart is our commitment to working closely with founders and established businesses, ensuring they have the leverage needed to scale. With Phintraco Natha Kapital, you not only gain an investor but also a partner dedicated to helping you grow and succeed for the long term. Interested in partnering with us? Click “Apply” to get started.Editor: Trie Ayu Feminin & Irnadia Fardila