Tuesday, August 13, 2013

Growth Equity performance to be benchmarked by Cambridge Associates

Cambridge Associates last week announced that it will begin posting quarterly performance benchmarks for “growth equity” as it has matured into its own distinct asset class. Russ Garland mentioned it WSJ’s Venture Capital Dispatch on August 7, 2013 and wrote:

"… The data make clear why growth equity is popular—it outperformed venture capital over the crucial 10-year window by nearly six percentage points. The annual return to limited partners by growth-equity funds for the 10 years ended Dec. 31 was 12.7% versus 6.9% for venture funds.

On top of that, growth equity was much less risky, generating a capital loss ratio of 13.4% compared with 35.4% for venture capital between 1992 and 2008. Significantly, its loss ratio was lower than buyouts’ 15.1%.

Cambridge Associates,
in a market commentary, defines growth equity as a strategy that sits between late-stage venture and leveraged buyouts. It flows to companies that need money for growth, most of them founder-owned with no prior institutional investment and a proven business model. Investors typically take minority stakes and use little if any leverage.

What is Growth Equity?  

Growth equity is one of three asset classes in PE: buyouts,(VC) and growth equity.

Here is what it does/what it’s used for:
  • Capital extension (cushion to reach next milestones/additional milestones).
  • Company, asset, or intellectual property acquisition financing.
  • Convertible, subordinated and mezzanine loans.
  • Management buy-outs and corporate spinout financing.
  • Revenue acceleration (sales and marketing development/entering new markets, manufacturing/corporate expansion, etc.)
  • Vendor financing.

In general, the characteristics of growth companies are: