ON THE RECORD

Why did Kennet decide to change tack and opt for a growth capital strategy in 2003?
We were quite successful as an early stage venture capital firm in the late 1990s, with some big exits, but when the tech boom ended in 2000, we had to start thinking differently about how to make money in venture capital. Whereas in the late 1990s, some exits were in the $500 million to $1 billion range, post-boom, most exits are now in the $100 million to $200 million range. When investing in such deals, you have to make sure the business is not using too much capital. In order for us to achieve a good return, our companies have to be much more efficient in their use of capital.

When and where did the concept of growth capital emerge?
Growth capital actually started as ‘development capital’ in the 1980s, and the two things are really not that different, except that development capital was more of a European term and ‘growth capital’ is more of a US term. The only obvious difference is that it is much more typical now to buy existing equity from the founders and shareholders as part of the deal, whereas this was basically unheard of in the 1980s.

Is growth capital a separate segment of private equity? How much overlap is there with late-stage venture and buyout?
Growth capital encompasses a broad range of investment strategies. However, the defining characteristics of a growth capital deal are strong revenue growth potential (between 20 and 50 percent per year) and little or no outside capital used to date. There is some overlap with both late stage venture and buyout but the growth capital segment is generally quite isolated. With the exception of the odd opportunistic deal, most venture firms stay away from growth capital, and most buyout firms are too big to consider the sort of deals that we do. The growth capital segment is therefore not as crowded as the venture or buyout segments. However, the fact that the market is comparatively uncompetitive is counterbalanced by the fact that there are fewer deals to be done here.

What types of companies does Kennet target?
We target companies in Europe and North America with sales in the $5 million to $50 million range. We like to be the first institutional investor in a business so we target boot-strapped companies (with little or no outside capital). We invest in both European and US companies.

What are the challenges that growth capital investors face?
One of the biggest challenges that players in this market face is finding companies. There are not many companies that are suitable for growth capital investment. Furthermore, these companies typically don't have an acute need for capital so they don't come looking for it – you have to seek them out and convince them to take capital. Another challenge is lack of control. The power relationship in growth capital is very different from that in venture or buyout – it is particularly important in growth capital to have the right relationship with the management team.