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.
In January, Blackstone launched a growth equity platform led by Jon Korngold, a former global head of financial services and technology at General Atlantic, following the creation of a dedicated life-sciences platform through the acquisition of global life sciences investment firm Clarus in October. In May, Warburg Pincus 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 a combined $8.3 billion. The average fund size is also increasing, almost doubling to around $320 million last year from $167 million in 2014.
And LP appetite shows no signs of abating; almost one-third of LPs who participated in PEI’s LP Perspectives 2019 survey say they plan to increase their target allocation to growth strategies over the next 12 months.
Industry bellwether California Public Employees’ Retirement System also has its sights set on the space. A pillar of the pension plan’s direct investing programme, Innovation, will have up to $10 billion for late-stage venture capital deals in life sciences, healthcare and technology.
Investment advisor Cambridge Associates has seen an increase in appetite among its investor clients for growth equity. With high valuations across the board, the strategy – characterised by high growth and low to no leverage – is looking increasingly attractive compared with typical leveraged buyout funds, says global head of private investments Andrea Auerbach, who considers growth equity a “complementary strategy to a levered buyout exposure”.
“You’re late stage, valuations are high for both strategies, one has more leverage than the other, one has less growth than the other,” she says.
What’s more, Cambridge research has found growth equity companies continued to grow during the global financial crisis, partly because they were unencumbered by leverage.
“I believe in any market, real growth is a scarce commodity. So growth equity companies can typically be sold when, heaven forbid, they need to be sold,” she says. “The capital loss rate for growth equity is equivalent to private equity; it’s 9 percent. The capital loss rate for venture is around 30 percent.”
It’s no wonder, Auerbach says, investors are keen to add this to their portfolios, particularly at this stage in the cycle. As of 30 September 2018, the Cambridge Associates US Growth Equity Index delivered a 10-, 20-and 25-year horizon pooled return of 13.92 percent, 17.14 percent and 20.58 percent, respectively. This compares with a US Buyout Index return of 12.81 percent, 12.09 percent and 13.20 percent over the same periods.