Hermes GPE retooled its private equity investment strategy in 2014, shifting from a buyouts-heavy exposure to growth investing.
Five years on and a key part of the firm’s private equity portfolio is now in direct growth equity investments, backing companies in digital, healthcare and sustainable innovation that are growing at about 30 percent to 50 percent per year, Elias Korosis, a partner at Hermes GPE, told Private Equity International.
Growth investments make up about 20 percent of Hermes GPE’s roughly $5 billion PE portfolio. The firm, which is a joint venture with Hermes Investment Management, expects to build up its exposure to growth investing in the near-term, it is understood.
“The growth capital space will grow as large as the buyout space currently is within a decade. It has the potential to grow exponentially with technology, capital and talent coming together, Korosis said.
“There’s this gap in the market and the industry is running at it from all three directions to fill the gap. The existing growth equity shops are getting bigger; the successful venture guys increasingly want to play in this space and raise growth funds; and a number of buyout shops are raising growth funds. Everyone wants to come into this space.”
This is most evident in Europe where tech investing has produced success stories – companies that show commercial traction at scale and generating ecosystems of their own, such as music streaming platform Spotify, Korosis added.
Europe had produced more than 30 unicorns as of November 2018, according to research by CB Insights.
Hermes GPE has invested in London-based food delivery company Deliveroo, Swedish fintech company iZettle and, across the Atlantic, San Francisco-based transport sharing company Lyft.
Valuations are still a concern, particularly with hyper-growth companies that are burning through cash and which have little prospect of profits at the group level, Korosis said.
“As an investor, you have to subscribe to a notion that at some point these will come in through the bottom-line,” he added. “We do this type of mega-play but we do it on an exceptional basis where we really think that company has something special and is going to win that kind of network.”
Growth stage private equity – at the intersection of private equity and venture capital – has benefitted from increasing LP appetite in recent years. According to PEI’s LP Perspectives 2019 survey, close to one-third of LPs who participated said they plan to increase their target allocation to growth strategies over the next 12 months.
Hermes raised £130 million ($164 million; €146 million) for a specialist growth venture fund, Hermes GPE Environmental Innovation Fund, in 2011, according to PEI data. It is also in market with its fourth global co-investment vehicle which has a $500 million hard-cap, as PEI reported in February.