Buyouts and growth equity are two investment strategies within private equity that offer investors exposure to companies of differing scale. Buyouts often involve more complex restructuring and operational improvements, while growth equity focuses on scaling operations, entering new markets, and enhancing product lines. Both strategies require a deep understanding of market conditions, company performance, and potential growth trajectories, especially as the private equity landscape has become increasingly saturated with opportunities.
What is a Buyout?
Buyouts refer to the acquisition of a company by an investor or group of investors. In a typical private equity buyout, a private equity firm purchases a majority ownership of an established company – often taking control of its operations. This usually involves:
- Gaining Control: In a buyout, investors take a controlling stake (often 100% ownership in a full buyout). With control, the new owners can install their own management or significantly influence company strategy. Often, the goal is to restructure or improve the business – this can occur through streamlining operations, cutting costs, or refocusing the company on core profitable areas. The idea is to unlock hidden value in a mature or underperforming company through active management and strategic changes. This active ownership approach is common in industries where companies have operational inefficiencies or untapped potential that a fresh owner can address.
- Using Leverage (Debt): Most buyouts are leveraged buyouts (LBOs), meaning the acquirer finances a large portion of the purchase price with borrowed money (debt). The acquired company’s assets and cash flows often serve as collateral for these loans. It’s not unusual for 50 to 70 percent of a buyout’s financing to come from debt. Using debt can amplify returns on the equity invested – if the company prospers, the investors’ smaller equity outlay yields a larger percentage gain. However, this leverage adds risk: if the company’s cash flow falters, it may struggle to repay the debt, potentially leading to financial distress.
- Return Strategy: Buyout investors typically seek to increase the company’s value and later sell it at a profit (or take it public). Returns in buyouts come from enhancing the company’s profitability and value over a holding period (often ~5-7 years), and from the effects of debt paydown. By the end of the holding period, the company might be sold to another firm or floated via an IPO, ideally at a significantly higher valuation than at purchase.
What is Growth Equity?
Growth equity is a private equity investment strategy focused on injecting capital into growing companies to accelerate their expansion. Unlike buyouts, growth equity deals typically do not involve taking full control or adding a lot of debt. Key characteristics of growth equity include:
- Minority Ownership Stakes: Growth equity investors usually take a minority stake (often 20–40% ownership) in the target company rather than buying a majority or 100 percent. The existing founders and management often remain in control of day-to-day operations. Growth equity investors will often pursue protective provisions and sit on the company’s Board of Directors to maintain some level of influence over decision-making. In most cases, the investor’s role is more of a partner providing capital and guidance, rather than an owner overhauling the business.
- Expansion Capital: The primary goal is to fuel further growth in a company that has already proven its business model. These are often companies that are doing well and have high growth potential but need additional funds to reach the next level – often to launch into new markets, develop new products, or scale up operations and sales teams. Growth equity funding is typically used for expansion initiatives rather than fixing fundamental problems.
- Little or No Debt Used: In contrast to leveraged buyouts, growth equity deals are generally financed with equity rather than debt. The growth investor infuses cash into the company; often the capital goes to the company’s balance sheet for growth projects, not just to buying shares from earlier owners. Because these deals don’t pile debt onto the company, there isn’t the same pressure of interest payments or risk of default due to high leverage.
- Return Strategy: Growth equity investors make money when the company’s value increases dramatically as it scales up. They often target high returns driven by rapid revenue and earnings growth in the business. For instance, if a company grows its revenues more than 30 percent year-over-year and achieves a much higher valuation after a few years, the growth investor can exit with a substantial profit. Returns might be realized when the company goes public or is acquired by a larger company. However, since growth equity doesn’t use leverage to boost returns, the outcomes rely purely on the company’s growth trajectory. If the growth stalls or falls short of expectations, the investor’s returns will suffer.
|
Aspect |
Buyouts |
Growth Equity |
| Ownership | Majority or 100% control | Minority stake (e.g. 20-40% ownership) |
| Use of Debt | Yes, often 50-70% of the purchase price | Little to no debt |
| Target Companies | Mature or undervalued companies | High-growth companies |
| Strategy Focus | Restructure and optimize | Accelerate growth |
| Management | Control changes likely | Founder/Management-driven |
| Investor Resources | Value creation + leverage | Growth-driven-returns |
| Risk Profile | Financial and execution risk | Growth, non-control and market risk |
Concluding Thoughts
Both buyouts and growth equity are essential strategies in the private equity world, each suited to different situations. Buyouts involve taking over companies to improve them, using financial leverage and hands-on management. Growth equity involves partnering with companies that are on the rise, providing capital and support while letting the original team stay at the helm.
Understanding these approaches can help investors decide which aligns with their goals and risk appetite. Some may prefer the high-control, transformation-focused nature of buyouts, while others like the collaborative, growth-focused approach of growth equity. Indeed, many investment portfolios include a mix of both.
Importantly, investments in buyouts and growth equity come with risks. There are no guarantees in private markets – outcomes depend on execution and market conditions. With informed strategy and due diligence, investing in private markets can be rewarding, but it should always be entered with a clear understanding of the risks involved.
