Growth capital is the type of financing that only experienced companies can get. They need this capital to expand and restructure their old structures and operations, as well as to develop and enter new markets. That is, the name of this type of capital practically matches its purpose: it is needed so that the company can continue to grow and develop. In this article, we will look at the characteristics of growth capital in more detail.
Growth capital and private equity fund
Growth capital, as a type of investment, presents some problems for private investors. Not all investors agree to this type of financing, and some PE firms prohibit providing growth capital altogether, and it’s written in their documentation. But why does this happen? Private equity firms are not interested in the opportunities that growth capital gives them, because they have to supply the company with funds permanently, with the risk of unforeseen results.
That is why, if investors do decide to invest growth capital, they require a solid and clear plan from the company, with specific requirements for their capital.
Characteristics of a Growth Capital Deal
Every deal has its unique conditions. All terms are determined according to key factors such as financial and operating history, market capitalization, and so on. So, for a growth capital deal, the terms are the same as the usual late-stage venture capital deals, for example, these terms include:
- In a deal, the investor will receive a share of the company in the form of a security
- The deal will have redemption rights, which are needed to create liquidity, such as during an IPO
- The transaction allows investors to have operational oversight of critical issues of the organization
- A growth capital deal grants the investor entitlements such as sharing, drag and drop, and record-keeping rights. These rights are granted based on the magnitude and extent of the trade and the issuance lifecycle
However, this type of deal has some differences with venture capital, so what are they? Investors acquire a minority shareholding, similar to the situation of venture capital, but companies that receive venture capital are typically just starting from scratch, while growth capital is granted to experienced organizations that already have high returns and brand recognition in the market.
Growth capital is also often equated with buyouts. A growth buyout involves investors acquiring more than half of the target company’s stock, using some combination of funds and debt, while with growth capital, PE firms take possession of less than half the stock and do not use credit funds.
For many companies, it is growth capital that can be a profitable process because they do not fall into the categories needed for venture capital financing or buyouts. They don’t grow fast enough for venture capitalists and don’t have the free cash flow that a buyout deal needs.
Growth Capital Structure
Once we have fully figured out what is growth capital, we can figure out its trends. The fact is that companies use the private equity method of providing growth capital because it helps to secure assets during growth capital. Particular protection is given to those assets that investors believe will provide the greatest benefit in the future, because of the high growth potential, or they are going to benefit through retention and ownership of the stock. Thus, the granting process of growth capital may have many of the features of a secondary redemption.