Growth investing set to take off in 2019

Blackstone is the latest manager to launch a strategy targeting companies that are still in the growth stage.

Interest in growth investing will continue to expand this year as more private equity firms launch strategies to back companies at the intersection of venture capital and traditional buyouts.

Summit Partners, a Boston-based growth equity manager, is set to hold a one-and-done on its 10th growth equity vehicle targeting $4 billion in February, according to US pension documents published in December.

Blackstone this month launched a growth equity platform led by Jon Korngold, a former global head of financial services and technology at General Atlantic, while Warburg Pincus last May began fundraising for Warburg Pincus Global Growth-E, which is seeking $13.75 billion, according to PEI data. That fund also has a China-focused companion vehicle with up to $8 billion to invest in the country.

First-time growth equity funds raised $46.9 billion between 2014 and 2018, according to PEI data. Last year, 26 debut growth funds raised $8.3 billion among them. That number is set to grow this year with almost one-third of LPs who participated in PEI’s LP Perspectives 2019 survey saying they plan to increase their target allocation to growth strategies over the next 12 months.

The average fund size is also growing, almost doubling over the last five years to around $320 million last year from $167 million in 2014.

Of the funds closed during that period, North America-focused vehicles accounted for 38.6 percent, Asia-Pacific for 19.8 percent and Europe for 12 percent, according to PEI data.

The high figure for Asia is no surprise given that GPs in the region rely more heavily on growth investments than buyouts due to the lower maturity and dynamics of the market.

Graham McDonald, head of global private equity at Aberdeen Standard Investments, told PEI in September that the firm continues to see Asia’s influence in the acceptance of technology capital, as well as the increasing numbers of growth-type activities. “We are fixated about change, we are fixated about disruption, we are fixated about technology and growth capital,” he said.

In terms of sectors, financial services, healthcare, technology and consumer are favoured. Retail health, for example, is appealing to private equity investors because the market is fragmented with strong growth characteristics, Bain & Company noted in its 2018 Global Private Equity Report. GPs such as Audax Group, Abry Partners and Summit have capitalised on this niche market. Audax rolled up two women’s health companies in Pennsylvania and New Jersey in 2017 into a new company called Axia Women’s Health. Summit, meanwhile, made investments last year in Sound Physicians, a hospital, telemedicine and physician advisor, and Sound Medical, a telehealth services company.

The strategy has also dominated investors’ interest. A pillar of the California Public Employees’ Retirement System’s direct investing programme, Innovation, will have up to $10 billion for late-stage venture capital deals in life sciences, healthcare and technology.