Sustainable economic recovery through growth equity

The private equity sector remains particularly competitive, continuing to grow despite the upheavals of COVID-19 and, most recently, the impact of the conflict in Ukraine. At the same time, portfolio companies have been severely tested as they faced serious headwinds during the pandemic. These factors have accelerated the emergence of growth equity investments in the private equity space.

Growth equity, also known as growth capital, refers to investment in late-stage or mature companies with high-growth potential but a lack of resources to achieve this growth. At RBC Investor & Treasury Services’ Private Equity Summit, held in Paris on March 30, 2022, a panel of industry experts examined the growth equity phenomenon, including key trends and how they’re expected to shape the evolution of private equity. Here are eight key takeaways from the event.

1. Growth is at the core of value creation in private equity

Growth is likely to continue to be a key driver of value creation, irrespective of asset class.

Guillaume Santamaria, Partner at InfraVia Capital Partners, a private equity firm focused on technology and infrastructure, singled out bootstrapping—when entrepreneurs rely on personal finances to found and build a company—as a trend for growth equity investments, particularly in the tech sector. "We see entrepreneurs who, after creating a really nice company without venture financing, are looking for financial partners," he said. "These partners can help the entrepreneur 'cash in' to accelerate growth or 'cash out' to receive part of their equity, depending on the need."

For funds interested in more traditional companies, Daniel Elalouf, Managing Partner at Montefiore Investment, a private equity fund specialist of growth equity, said that supporting and accelerating growth will also be winning strategies for value creation.

2. Portfolio companies increasingly see M&A as an investment for value growth

In the past, many startups didn't consider M&A as a viable step to grow their business, opting instead for less-risky organic growth. However, entrepreneurs are revisiting M&A as a significant value boost, especially when considering future sale of the company.

Entrepreneurs are revisiting M&A as a significant value boost

“With the right guidance, we've managed to adjust the strategy to bring us business value," said Patrick Aisenberg, Co-Founder of LINKBYNET, a cloud service provider acquired by Accenture in 2021. “Out of the five acquisitions we’ve made, three or four were definitely more relevant of which one or two contributed strongly to the valuation of the company in the context of the sale."

3. M&A should support the strategy and not be a strategy in itself

M&A is intended to support a firm’s strategy and promote growth acceleration. It’s important for portfolio companies to allocate part of their revenue to R&D and maintain a permanent roadmap of new products and services, whether this is targeted through organic growth or acquisitions.

“The question we ask is: Are we going to manufacture this with our existing engineers, or are we going to buy technology or talent to accelerate our roadmap?" said Santamaria.

4. Venture capital has acquired a taste for M&A growth—with conditions

In the past, venture capital tended to avoid M&A since the main goal was to help entrepreneurs and their companies grow organically. Today's entrepreneurs are increasingly sophisticated, run larger operations, and have the skills and experience to manage the challenges of growing a company through M&A. One of the key elements of achieving success in this area is to effectively integrate the acquisitions and transmit a strong culture to the targets.

Today's entrepreneurs are increasingly sophisticated

For Santamaria, an entrepreneur's readiness to lead M&A integration is an important parameter. “Do we have in front of us an entrepreneur who has the capacity to do this? If we don't have that, we will reject the M&A deal," he said.

5. “Copycat" M&A can help with global market access

International growth through M&A often involves the targeting of competitors that operate in the same sector but have been less successful. These “copycat" companies are aware of their position and are open to accepting the culture of the more successful buyer. “This is very important because the culture of the company that is funding the takeover will become the culture of the target. There should never be two separate cultures," Santamaria said.

However, this approach may not work for larger or more mature companies, especially if they operate in the services sector. “One of the key problems with M&A, particularly for service companies, is sharing a common culture and converging practices," said Elalouf. “This means the reds will not win over the blues, but will create a purple culture where everyone works together on a common project that blends the two."

6. Platforms can be a growth alternative to M&A

Many private equity and venture capital firms are opting to set up platforms to help their portfolio companies grow. These platforms function as a support network where startup founders can seek assistance with public relations, recruiting, legal services, connecting with other companies, development and strategy advice, and many other business interactions.

The idea of the group is to create commercial synergies

For example, Montefiore has created a platform that groups all the skills necessary for a company to accelerate its digitalization. “We have linked up entrepreneurs to a common project. In this platform, founders remain in charge of their company, but are also part of the larger group. The idea of the group is to create commercial synergies."

7. Growth equity investors stand by entrepreneurs during crises

Growth equity investors aim to play the role of supportive partner even when major systemic crises such as COVID-19 impact portfolio companies and their founders.

Elalouf indicated that Montefiore views entrepreneurs as close associates, irrespective of their stakes in the portfolio companies. “This means that we position ourselves not as fair-weather friends but as long-term partners, whether the times are good or bad."

8. Cash management is a key parameter for surviving the unexpected

Growth funds that invest in technology are accustomed to the financing of companies that are not yet profitable and where it’s necessary to keep a tight grip on cash management. This has been particularly useful during the pandemic, when the businesses of many portfolio companies came to a standstill.

Start-ups and entrepreneurs are well-positioned to overcome structural headwinds

“There has been a fairly drastic reduction of the burn rate (spending of a company) in order to maintain cash levels," said Santamaria. "In a few cases, we reduced the teams and postponed plans by one or two quarters but, from September 2020 onwards, the situation started to ease. And that's when we saw a surge in demand for our companies' technology."

As the world emerges from the COVID-19 pandemic, start-ups and entrepreneurs hold the promise to driving a sustainable economic recovery. With the support of growth equity and its dynamic approach to investment, they will be well-positioned to overcome the structural headwinds ahead.


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