Growth Equity
With the support of growth equity investors, you can unlock the potential for remarkable revenue growth and operational improvement. Our FP&A expertise in financial planning and analysis can help craft a compelling mid-term business plan that resonates with investors and propels substantial growth. We can assist you in preparing a business plan that showcases your growth potential and attracts the right investors to help you achieve it.
Did you know that growth capital isn’t just about expanding your business? It can also be a game-changer when entering new markets and developing new products and subsidiaries. With the proper infusion of funding, the sky’s the limit for what you can achieve! Growth equity investments focus on accelerating operational improvements and revenue growth, maintaining low leverage, and providing downside protection. Companies in the growth equity stage are typically expected to achieve profitability shortly or have already achieved it. Growth equity managers concentrate on sectors expected to grow faster than the overall economy.
Growth Equity Value Proposition
Growth Equity Objective
Investor Outlook
Reliance on Secular Growth
Minority Stake
Business and Executive Coaching and Competence Focus
Objective
How Do We Help?
Fintelligence Consultants have a unique approach to raising funds and attracting investors. Attracting investors involves building various stages and converting the company into a growth champion. Fintelligence consultants assist you in preparing the company to develop critical characteristics. The journey takes 12 to 18 months to establish the foundation and strengthen the balance sheet so that intrinsic valuation becomes solid, leaving an excellent opportunity to enhance the valuation in the future.
Establishing The Foundation
- Governance- Creating a robust control environment
Driving High Performance
- Strategy – Developing a clear strategy
- Benchmarking – Benchmarking Performance
- Funding – Certainty of Funding
- Working Capital – Generating Cash
- Forecasting – Robust Forecasting
- Profit Maximization – Driving Profitable Growth
- Data Analytics – Translating Data into Insight
Getting Ready to Investor and/or Exit
- Due Diligence – Attracting Investor
- Preparing the right exit strategy
We focus on educating business owners about Growth Equity opportunities and benefits.
- Provides additional working capital as you receive new funding from investors
- Shares relevant industry connections and networking opportunities
- Diversifies business by integrating new processes and hiring high-quality talent
- Reduces overhead costs as operations are streamlined
- Assists with the development of new products and services
- Integrates more robust risk management strategies from rework of infrastructure and systems
- Provides expert insight into growth strategies and dealmaking
- Growth equity managers are in an excellent position to provide the necessary capital and resources to support these businesses.
What Value Does Growth Equity Create for My Business?
This value generally comes in two (not mutually exclusive) forms:
- Accelerated growth can be achieved by investing in technology, new products, sales and marketing, acquisitions, and geographic expansion to strengthen competitive position, increase market share, and achieve long-term goals.
- Many businesses founded and managed by entrepreneurs are looking for ways to cash out a portion of their ownership while maintaining control and independence. These businesses often prefer to remain private or consider succession planning. The fixed and working capital requirement increases with business growth and expansion. Therefore, evaluating the different sources from which funds can be raised is essential.
How Can I Make My Company Attractive to Investors?
- Industry:- High-growth companies that deliver potentially high returns typically receive growth equity. Companies receiving investment can generally be market leaders or be first in a growing marketplace or industry sector.
- Clear Exit Strategy:- Investors are attracted to companies with a clear exit strategy, which allows them to obtain a return on their investment. Exit options, or "liquidity events," include an initial public offering, private placement, acquisition, merger with another company, or management-led buyout. Investors generally have a time and want to exit within 3-5-7 years.
- Equity or Financial Return:- Equity investors are attracted to companies that likely demonstrate significant economic returns. Generally, these investors want to see more than 50 percent profit margins.
What if I Don’t Want to Dilute Equity? Do Still Investors Ready to Invest?
Mezzanine Finance
For many businesses, the mezzanine is not viewed as permanent capital but as medium-term addressing business solution-oriented capital that serves a specific purpose and can later be replaced with lower-cost capital, i.e., senior debt.
Mezzanine finance typically consists of ‘subordinated debt’ or ‘preferred equity.’ A fixed-rate coupon or dividend is applied. Although it may have some participation rights in a business’s common equity, it is materially less dilutive than common equity.
Mezzanine financing is a strategic financial tool that allows companies to grow faster than they could on a senior basis alone. It also facilitates ownership or management transitions, allowing existing stakeholders to increase their ownership interest. This flexible and versatile financing option can provide a secure and informed path to your company’s growth.
Before committing to mezzanine financing, a company should be sure it is the correct type of capital to meet its needs. As mentioned earlier, the mezzanine is not typically used as permanent capital but as solution-oriented capital that performs a definitive purpose and can be replaced over the medium term with more conservative, less expensive financing.
Additionally, the mezzanine is a patient source of financing that enables businesses to accomplish their growth goals, whether building a larger production facility or completing an acquisition that cannot be realized with only senior funding.
The mezzanine can be considered a tool for incremental leverage to facilitate various business requirements. Here are eight uses for mezzanine financing:
- Recapitalization:- Recapitalizations could involve raising new capital to restructure debt and address the debt-equity mixture on a company’s balance sheet. They are an ideal use case for mezzanine financing, especially when owners want to achieve partial liquidity and maintain business control. For example, mezzanine financing can be used when shareholders seek partial or complete liquidity. In contrast, other shareholders seek to remain actively involved in the business.
- Growth Capital:- Growth capital helps companies achieve their goals for organic growth, such as making significant capital expenditures or constructing many facilities. It can also be used for market expansion, such as entering new markets by developing new products and subsidiaries.
- Acquisitions:- Mezzanine financing can finance acquisitions, where companies purchase other businesses to grow and respond to customers’ needs quickly. Through acquisitions, companies can access adjacent markets and diversify their customer base.
- Refinancing:- Refinancings commonly use mezzanine financing to pay off or replace existing debt and take advantage of lower interest rates and better terms. Mezzanine financing, a structured fund, adds flexibility to a company’s debt capital structure. They were preparing to seize opportunities like acquisitions and shareholder buyouts.
- Balance Sheet Restructurings:- Mezzanine financing is well-suited for balance sheet restructurings as it can optimize debt capital structure, fulfill transaction requirements, and create additional senior debt capacity for a business. Balance sheet restructurings can be part of a more significant or standalone transaction.
Additionally, growth capital could help companies achieve their goals for organic growth by making significant capital expenditures or constructing many facilities.
What is the Growth Equity Fund Investors' Perspective?
Growth equity and buyout investors target mature, profitable companies with established operations and a track record of performance; as a result, these investors have access to historical data plus the intrinsic value of a going concern and its assets to determine a target’s value. Given the maturity of these businesses, growth and buyout investors focus on profit multiples to value a target; EBIT and EBITDA are preferred over net earnings, as they are not subject to a company’s capital and tax structure.
Based on input from management and findings from due diligence, growth equity, and buyout, investors develop business plans with multiple operating scenarios: the base case financial scenario represents the target’s expected operating performance. In contrast, downside and upside cases reflect scenarios of underperformance and outperformance, respectively. Although multiple expansion and contraction are considered in the context of broad industry and market cycles, a reasonable starting assumption for the base case is a constant multiple for both entry and exit valuation.
What are the Parameters that Investors Consider When Investing in Companies?
The Sustainable Competitive Advantage
- Identify unique elements of a company’s business model (e.g., network effect, low-cost advantage, strong brand awareness, and high switching costs).
- Can this company defend and sustain its competitive advantage over the long term?
Competitive Analysis
- Assess the industry for entry barriers, rivalry, power of buyers versus suppliers, and substitution threats.
- Value chain evaluation and profit pool analysis help the structural winners in the long term.
Financial Analysis
- Assess balance sheet health (low or no debt is ideal), capital intensity, business mix, and margin structure.
- Require sustainable free cash flow growth, an ability to meet reinvestment needs, and cash flow return on investment above the cost of capital.
Management
- Partner with management teams who share our long-term perspective, manage the business with vision and integrity, and whose incentive is aligned with long-term shareholder interests.
- Evaluate management’s ability to allocate capital to investments, creating long-term value.
Growth Drivers
- Evaluate sources and sustainability of profitable growth.
- Focus on long-term secular and structural growth drivers—dynamics that are not likely to change in five years or more.
- Forecast the growth rate independent of company guidance or street expectations.
Intrinsic Valuation and Range
- A company’s value depends on its long-term ability to generate profitable free cash flow growth.
- The present value of future free cash flows is our core methodology for estimating intrinsic value.
- Conduct sensitivity analysis of key variables to assess downside risk and focus on high-impact value drivers.
- Best-, base-, bear- and worst-case valuation scenarios guide the timing of buy/sell decisions and help guard against decision-making pitfalls.
Expectations Analysis
- Assess the assumptions implied by the intrinsic valuation and current stock price to differentiate fundamental drivers of value from market sentiment drivers of price. Understand the market perception and how it differs from fundamental intrinsic valuation.
What is Investor Strategy Post-Investment?
After identifying priority companies, investors can adopt various strategies to achieve optimum growth. While some funds may have a more passive approach and be less focused on building capabilities, many operating teams may need to act as coaches for portfolio companies to unlock returns. Additionally, only some high- growth companies have executives with experience navigating the current economic slowdown.
A value-creation strategy can help portfolio companies achieve optimal growth.
Accelerate Revenues. In uncertain times, investors need to build up cash balances quickly. Portfolio companies should accelerate revenue generation and increase annual recurring revenues to achieve this. This can be done by releasing products earlier and conducting presales activities.
Investors can also help portfolio companies optimize their costs and adjust their workforce. This can include using design-to-value product development approaches, evaluating possible procurement savings, and facilitating organizational design and restructuring programs. Additionally, investors should consider supporting these companies in implementing cash management targets, which are typically not their area of focus.
Growth-oriented cost optimization
- Optimize Pricing:- Optimizing pricing to achieve long-term success is essential in times of high inflation.
- Focus on Customer Value Management:- In today’s uncertain times, companies should maximize customer lifetime value by improving their end customers’ value perceptions, which will help retain and engage them despite the prevailing pricing and margin challenges.
- Improve the Approach to Sales:- The sales cycle will be more challenging for many industries than in the past few years. Ensuring customer segmentation education to sales teams and receiving training to navigate more challenging sales discussions is critical.
- Find Growth Opportunities:- Amidst risks for most companies, they also offer growth opportunities, given changing customer preferences and an evolving competitive ecosystem. Investors can help their portfolio companies understand growth topics and expansion opportunities aligned with long-term trends and identify potential new markets, product adjacencies, and even M&A targets.
Why Choose Us?
Value Creation Approach
Business Owner Perspective
Investor Perspective
Planning and Execution
Coaching and Competence Focus
Our unwavering focus on coaching and developing competence underscores our commitment to helping our clients achieve sustainable business results. We believe that meticulous execution and an unyielding dedication to improvement are paramount. We offer comprehensive supportive services to ensure our clients thrive, including personalized business coaching, tailored competency development, hands-on process support, adequate tool support, and customized mentoring. We aim to empower our clients to attain and maintain their desired outcomes, ensuring their long-term success and prosperity.
How Do We Serve Our Clients?
Frequently Asked Questions
Growth equity investors offer financial support and the potential for significant revenue acceleration, operational enhancement, and unparalleled access to private equity. This strategic partnership with investors can propel your company towards a future of growth and success, backed by a large alternative asset manager. Imagine the possibilities with access to strategic resources, operational capabilities, and transformational growth opportunities.
Assured Business Growth
- Powering Growth: Entrepreneurs can expand their customer base and establish connections across industries and geographies with access to an investor network of portfolio companies.
- Scaling Efficiently: Resources and expertise for intelligent, efficient scaling.
- Attracting Talent: The network provides exceptional access to experienced executives and talent development experts.
- Strategic Partners: Provide liquidity to investors and collaborate with managers globally.
- Information Advantage: Extensive global network and industry knowledge enables growth opportunities.
- Industry—High-growth companies that deliver potential high returns typically receive growth equity. Companies receiving investment can generally be market leaders or be first in a growing marketplace or industry sector.
- Clear Exit Strategy—Investors are attracted to companies with a clear exit strategy, which allows them to obtain a return on their investment. Exit options, or “liquidity events,” include an initial public offering, private placement, acquisition, merger with another company, or management-led buyout. Investors generally have a time and want to exit within 3-5-7 years.
- Equity or Financial Return – Equity investors are attracted to companies that likely demonstrate significant economic returns. Generally, these investors want to see more than 50 percent profit margins.
Growth equity’s unique risk-return profile, driven by a focus on accelerated operational improvements and revenue growth, low leverage, and downside protection, has created dedicated allocations across many portfolios and has made it a bright spot in today’s investment landscape.
Growth Equity Investment targets. Growth equity funds seek to invest in well-run companies with proven business models (i.e., established products and technology and existing customers) and a history of significant and rapid revenue growth (usually over a 10% run rate and often more than 20%), which minimizes the technology adoption risks frequently associated with venture capital investing. Growth equity investments are typically underwritten on relatively defined profitability milestones and tend to have limited, quantifiable future funding needs to achieve their goals.
While typical growth equity stage companies are either already cash flow positive or are expected to reach profitability in the near term, they are often looking to grow even faster than what their internally generated cash flow can support. Growth equity managers focus on sectors expected to expand more rapidly than the broader economy. This focus, combined with growth equity’s comparatively lower risk than venture, has made the asset class attractive in today’s macroeconomic environment.
- Stage. Invests in growth and mature businesses with predictable cash flows
- Risks. PE funds typically take execution, growth, and expansion risks. Normally, Pes invests in post-revenue and earnings before interest, taxes, depreciation, and amortization-positive companies.
- Stake. Do both minority deals (10%-30% stake) and buyout/control deals
- Investment. A mix of equity and debt and other structured transactions, such as leveraged debt
- Deal Site. Typically, large rounds with deal sizes >100 million. Few growth equity funds targeting the middle market and small and medium enterprises (SMEs) offer ticket sizes starting from $ 5 million.
- Returns. 2x return is considered an appropriate benchmark.
- Horizons. Typically, 3-5 years
- Exits. Other exit options include public offerings (IPOs), mergers and acquisitions (M&As), and secondary sales.
Growth Equity investment firms seek downside protection for their investments. Growth equity investments can be minority or majority in nature but typically use little to no debt. The lack of financial leverage makes these businesses more flexible in the face of cyclical headwinds and mitigates risk for investors.
In addition, while venture capital and growth investors will almost always take preferred equity or otherwise structure the investment to be senior to management’s ownership, growth equity investors typically also benefit from protective provisions and redemption rights. While these rights will vary from investment to investment, they generally include the right to approve material changes in business plans, new acquisitions or divestitures, capital issuance, the hiring or firing critical employees, and other operational matters. Redemption rights are also heavily negotiated and generally based on either time elapsed since investment or testing business results against pre-set performance milestones or financial covenants.
- Industry—High-growth companies that deliver potential high returns typically receive growth equity. Companies receiving investment can generally be market leaders or be first in a growing marketplace or industry sector.
- Clear Exit Strategy—Investors are attracted to companies with a clear exit strategy, which allows them to obtain a return on their investment. Exit options, or “liquidity events,” include an initial public offering, private placement, acquisition, merger with another company, or management-led buyout. Investors generally have a time and want to exit within 3-5-7 years.
- Equity or Financial Return – Equity investors are attracted to companies that likely demonstrate significant economic returns. Generally, these investors want to see more than 50 percent profit margins.
