Growth Equity Growing Into Golden Age

May 04, 2015

A recent opinion published in the Wall Street Journal claimed the glory days of private equity are over, but at Frontier Capital we believe that the growth equity strategy within private equity remains an attractive segment of the industry and is moving into a bright future.

As the name implies, growth equity is a private equity business model focused on growth, rather than leverage. Firms in this sector don’t invest in billion-dollar startups or mega deals underwritten with leverage, as is seen in private equity. A June 2013 report by Cambridge Associates, “Growth Equity Is All Grown Up” describes the strategy as, “somewhere between late-stage venture and leveraged buyouts – investing in established companies that can benefit from additional capital to accelerate growth.”

Growth stage companies typically operate in sectors growing faster than the overall economy. These businesses have proven business models, attractive revenue growth and are modestly profitable due to heavy investments supporting growth. Companies typically seeking growth capital are founder-owned with no prior institutional capital.

At Frontier Capital, we focus exclusively on software and technology-enabled business services. Our targets are high growth technology companies not in Silicon Valley but in places like Dallas, Denver, Atlanta or Chicago. We like to call them the high growth/low-hype markets. Many of these businesses are growing at more than 30 percent annually and have been founded by CEOs who are not whiz kids right out of college, but hard-working executives who have poured in 5-10 years of sweat equity and hard work to build a business with $10-20 million of revenue.

Our approach is to strengthen balance sheets, not leverage them up. Our companies are seeking capital to make investments in talent, technology, and sales and marketing. These companies are hiring, are fun places to work and are in large supply.

In sum, not all private equity business models are based on debt and cost cutting. For us, it is not back to basics, but it has always been about the basics of helping talented teams build great growth companies. We believe growth equity has a very bright future within private equity.

Also see VentureBeat: “The glory days for growth equity are just getting started,” by Richard Maclean, managing partner, Frontier Capital for more positive trends in growth equity.