Table of Contents
What Is Growth Equity?
- CLFI Team
- 9 min read
Growth equity sits between venture capital and leveraged buyouts in the private markets spectrum. It focuses on established, scaling businesses that need capital and expertise to accelerate growth but where founders and existing owners still retain control. For executives, board members, and founders, understanding how growth equity works, how it is structured, and how it creates value is essential when evaluating strategic funding options or partnering with an external investor.
Table of Contents
- Definition of Growth Equity
- How Growth Equity Differs from Venture Capital and Buyouts
- Partnership and Alignment with Founders
- Where Growth Equity Capital Is Used
- Typical Growth Equity Target Companies
- The Growth Equity Investment Process
- Minority Shareholder Rights and Governance
- Risks, Challenges, and Exit Routes
- Growth Equity in Emerging Markets
- Growth Equity in Practice for Executives
- Further Reading
Definition of Growth Equity
Growth equity is a form of private equity investment in established companies that already have a proven business model, clear product market fit, and meaningful revenue, yet still require capital and support to scale. The investor typically acquires a minority equity stake, sits alongside existing owners, and provides both capital and expertise to fund expansion, professionalise the organisation, and prepare the company for a larger liquidity event in the future. The focus is on growth and value creation rather than using significant leverage to amplify returns.
Definition:
Growth Equity
Growth equity is minority private equity investment in established, growing companies, where capital is used primarily to fund expansion and operational improvement rather than to gain control or heavily leverage the balance sheet.
The benefit of this approach is that owners can access institutional capital, networks, and governance experience without relinquishing control of the business. The risk for investors is that, as minority shareholders, they are exposed to the outcome of strategic decisions that they cannot fully direct, which makes initial alignment on the growth plan and governance structure critical.
How Growth Equity Differs from Venture Capital and Buyouts
It is helpful to position growth equity relative to venture capital and leveraged buyouts. Venture capital usually backs earlier stage companies that are still refining their product, business model, or go to market strategy, with a higher probability of failure and a wider dispersion of outcomes. Leveraged buyouts, by contrast, involve acquiring a controlling stake in typically mature businesses, often using significant debt financing. Growth equity sits between these two, targeting businesses that have already reached profitability or a clear path to profitability, but that still operate in markets with meaningful headroom for expansion.
In this middle ground, investors seldom rely on high leverage to deliver returns. Instead, the value creation thesis focuses on revenue growth, margin improvement, and professionalisation. The benefit is a more growth oriented return profile, with operational and strategic levers at the centre of the plan. The main risk is that, without control, the investor can be constrained when tough decisions are required, for example around restructuring, pricing strategy, or replacing key executives.
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Partnership and Alignment with Founders
Because growth equity investors usually hold a minority position, the relationship with founders and management looks more like a partnership than a takeover. Investors bring financial expertise, experience of scaling organisations, and access to broader commercial and capital markets networks. Founders and senior managers contribute deep operating knowledge, customer relationships, and credibility with staff and stakeholders. When alignment is strong, this combination can be powerful, as each side contributes complementary skills toward a shared growth plan.
The challenge is that expectations, culture, and time horizons can differ. Some founder led or family owned companies may be cautious about change, sensitive to perceived interference, or strongly attached to existing ways of working. Growth equity investors, on the other hand, are accountable to their own fund investors and must deliver returns within a defined holding period. Both parties therefore need clarity at the outset on growth targets, governance arrangements, and the practical boundaries of decision making authority.
Where Growth Equity Capital Is Used
Growth equity capital is typically deployed for two broad purposes. First, it funds specific projects that expand or strengthen the business, such as entering new geographies, investing in product development, scaling manufacturing capacity, or consolidating a fragmented market through acquisitions. Second, it can provide partial liquidity to existing shareholders, simplify a complex shareholding structure, or enable earlier investors to exit while keeping the core ownership group in place. The balance between these uses is negotiated deal by deal and affects both governance dynamics and return potential.
The benefit of funding value accretive projects is that capital can directly drive revenue growth and margin expansion, which supports higher valuations at exit. However, there is execution risk in each initiative, particularly when companies expand internationally, enter adjacent customer segments, or acquire other businesses. Using part of the capital for shareholder liquidity can help align incentives and reduce complexity, although an excessive focus on cashing out existing holders may limit the resources available for genuine growth initiatives.
Typical Growth Equity Target Companies
Growth equity investors tend to focus on three broad categories of target companies. One group is late stage, venture backed businesses that have moved beyond the start up phase, built a defensible position, and reached profitability or clear cash flow visibility. Another group is mature small and medium sized enterprises that hold strong positions in attractive niches, often with established brands and loyal customer bases but limited access to institutional capital. The third group consists of corporate carve outs or spin offs, where a division of a larger group is separated and supported with fresh capital and governance.
Each category presents different benefits and risks. Late stage venture backed companies may grow quickly but face intense competition and pressure to maintain high valuations. SMEs can offer stable recurring revenues and strong market positions, although they may require substantial investment in systems, talent, and governance. Corporate spin offs may have attractive assets that have been under resourced inside a large group, yet the separation process and stand alone build out can be complex and time consuming.
The Growth Equity Investment Process
The investment process in growth equity reflects the minority nature of the stake and the fact that the most attractive companies are not always actively seeking capital. Deal sourcing often relies on long term relationships with founders, families, advisers, and regional networks. Investors may spend years in dialogue with a company, sharing perspectives on strategy and monitoring performance before an investment opportunity arises. This relationship based approach can provide privileged access but requires patience and disciplined pipeline management.
Due diligence frequently involves working with imperfect information. Reporting systems in founder led or rapidly growing companies may be basic, and historical data may not fully capture the dynamics of a scaling business. Investors must therefore blend quantitative analysis with qualitative assessment of management quality, culture, and organisational readiness for the next growth phase. The advantage is that a close working relationship can be built even before signing. The threat is that, under competitive pressure, investors might accept information gaps or terms that later constrain their ability to influence outcomes.
Minority Shareholder Rights and Governance
Given the constraints of minority ownership, growth equity investors pay close attention to contractual protections and governance rights. These typically include board representation, information rights, and a set of reserved matters where the investor has approval rights over key decisions, such as changes to the budget, major acquisitions or disposals, significant new borrowing, and senior management appointments. In some cases, investors negotiate voting rights that are slightly stronger than their pure economic ownership to ensure they can protect their position in critical situations.
These provisions help to mitigate the risk that majority owners might take decisions that are detrimental to minority investors, for example related party transactions or aggressive dividend policies. However, contractual rights mainly provide a veto, not the ability to design strategy unilaterally. The real driver of value creation remains a constructive relationship between the investor and the controlling shareholder. Overly restrictive terms can damage trust and slow down decision making, while overly light terms may leave the investor exposed if the relationship deteriorates.
Risks, Challenges, and Exit Routes
As with other private equity strategies, growth equity funds usually target exits within a three to seven year horizon. Potential routes include a sale to a strategic buyer, a sale to another financial sponsor, a buyback by the founder or family, or an initial public offering if the company reaches sufficient scale. Strategic buyers often prefer control, so in some cases the majority owner may sell alongside the growth investor, converting the situation into a change of control transaction. Alternatively, a secondary sale to another fund can provide liquidity while preserving the company’s independence.
Exits from a minority position are not always straightforward. Differences in valuation expectations, non financial objectives such as preserving family employment, or disagreement on timing can delay or complicate a transaction. To address this, growth equity investors negotiate additional contractual tools, such as put options at predefined valuation formulas, drag along or tag along rights, and mechanisms that trigger liquidity events under certain conditions. These safeguards provide structure, yet they cannot fully eliminate the risk that market conditions or shareholder dynamics will make timely exit more difficult than expected.
Growth Equity in Emerging Markets
Growth equity has been particularly important in many emerging markets, where economic expansion has created large numbers of successful, often family owned businesses. These companies may have grown rapidly with limited formal governance or institutional capital and may be reluctant to surrender control to a buyer. Minority growth investments allow founders to bring in capital and professional expertise to strengthen governance, upgrade systems, and attract senior management talent while keeping ownership concentrated within the family or original entrepreneur group.
For investors, emerging market growth equity can provide access to companies that benefit from structural demographic and consumption trends. At the same time, it raises additional risks related to legal frameworks, enforceability of shareholder rights, and transparency of financial information. Robust local legal advice, careful partner selection, and sensitivity to culture and business norms are essential if the strategy is to deliver sustainable value for both investors and the companies they back.
Definition:
Risks of Debt and Private Credit
Debt introduces fixed obligations that reduce financial flexibility, increase insolvency risk, and amplify losses when performance deteriorates. These risks are particularly visible in the fast-growing private credit market, an opaque segment of the shadow banking sector, where loans are issued by non-bank institutions that face minimal regulatory scrutiny.
Recent failures highlight how excessive borrowing can trigger wider financial instability. The collapses of US firms First Brands and Tricolor resulted in substantial losses for regulated banks exposed to their private credit financing, including Jefferies (reporting a $715m exposure) and JP Morgan (recording a $170m loss). These cases demonstrate how debt-supported business models can quickly unravel, with losses spreading beyond the original borrower.
The broader private credit industry is dominated by major alternative asset managers such as Blackstone, Apollo, Ares, and KKR. Their lending activities often sit outside traditional regulatory frameworks, limiting transparency and preventing regulators from assessing the true value and risk profile of underlying loans. This opacity increases the likelihood that problems remain hidden until defaults occur, at which point both borrowers and lenders may face sudden and severe financial stress.
In practice, high leverage restricts a company’s capacity to invest, weakens operational resilience, and heightens the probability that even moderate earnings volatility leads to covenant breaches or failure. When combined with the opaque nature of private credit markets, the use of debt can generate systemic vulnerabilities that affect banks, investors, and pension funds linked to these structures.
Growth Equity in Practice for Executives
For a founder or CEO, choosing a growth equity partner is not only a question of valuation. It is a decision about who will sit around the board table, shape strategy, and work alongside management during the most demanding phase of the company’s development. Executives should assess potential partners on their experience in similar sectors, their track record of helping companies professionalise and scale, and their practical contribution beyond capital, for example in international expansion or preparing for a future sale or listing. The right partner can enhance discipline, sharpen resource allocation, and open doors to new markets and customers.
In practice, growth equity is most effective when both parties approach the relationship with clarity and mutual respect. Boards should ensure that investment agreements set realistic growth targets, define governance clearly, and leave space for management to lead the business day to day. At the same time, executives should be open to external challenge and willing to use the investor as a sounding board on capital allocation, senior hiring, and strategic trade offs. When growth equity is used thoughtfully, it can become a tool for building companies that are larger, more resilient, and better governed, which ultimately strengthens boardroom decision making and long term value creation.