Growth Equity vs Private Equity: Key Distinctions

Updated 10/16/2023

There are various types of investment opportunities and classes for companies to consider. Growth equity and private equity are two of the most common examples of this.

There are various similarities between these two types of equity investments, but it's important to note that they are distinctly separate, with clear differences to set them apart.

This guide will cover the main differences in growth equity vs private equity, as well as looking at what growth equity is and how it works.

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What Is Growth Equity?

Growth equity, which can also be referred to as growth capital, expansion capital, or growth-stage private equity, is a form of investment that focuses on established, mature companies that are preparing for some sort of expansion, growth, or development, such as the launch of a new strategy or the expansion into a new market.

Growth equity firms will invest minority stakes into companies that are willing to accept this type of investment, helping them grow faster.

Typically, the companies in receipt of growth capital don't really need it, but are willing to give up some level of ownership in order to receive immediate funding and more potential for growth in the future. 

Source: Wall Street Prep

The investment allows the companies to grow at a faster rate, rather than continuing at their current rate and simply using cash generated by their own business operations to fund their expansions and developments, like the creation of new products or services, up-scaling of the company's sales, a new acquisition, etc.

Additionally, growth equity companies can often offer professional guidance and consultation that benefit company growth. 

Growth Equity vs Private Equity Differences

So how do growth equity and private equity differ?

Well, technically speaking, growth equity is a part of the private equity industry, but it is a very specific aspect and can be more accurately defined as a compromise between private equity and venture capital, aiming to offer the "best of both worlds" in terms of risk levels and potential yields. 

Here are some of the key differences when it comes to private equity vs growth equity:

1. Level of investment 
2. Associated risk
3. Intent
4. Targets
5. Returns
6. Sourcing methodology

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1. Level of Investment

One of the big differences that sets growth equity apart from standard private equity is the level of investment. Growth equity firms only invest minority stakes, whereas in PE, firms often acquire entire companies.

2. Risk

The risk with growth equity vs private equity can also be different. It all depends on the specifics of the deal and investment in question, but in general, growth equity is slightly riskier than PE investments, due to the fact that these investments are placed in growing businesses with strategies that still need to be put into action and may not turn out as expected.

3. Intent

The intent is also different in growth equity when compared to PE. With growth equity, the money invested has a clear purpose of being used to fund some sort of expansion or development strategy. With PE, investors also want the company to grow but aren't specifically focused on any specific growth activities.

4. Targets

The ideal target for a private equity investment will often be a proven, established, profitable business with an impressive financial situation and strong cash flow reports.

For growth equity, it's more common to target established but still reasonably young companies that may or may not be profitable at the moment but have a clear path towards customer acquisition and growth through investment in growth activities and strategies.

5. Returns

With growth equity investment, returns are earned almost entirely through growth. This can be organic growth over time as new products and services are developed and launched or through acquisitions and partnerships. In PE, growth can be earned from other sources like debt paydown.

6. Focus on Sourcing

Another big difference between PE and growth equity is in terms of how target companies are found and sourced. Private equity sourcing can be done through banks and financial modeling, but with growth equity, firms often don't actually need the money, so they aren't always as easy to find.

Growth equity professionals and teams may therefore have to spend more time on independent research, cold calling, and other methods to actually find companies that are receptive to growth equity investment.

Growth Equity vs. Venture Capital Differences

As well as having some key differences with private equity, growth equity is also distinctly different from venture capital. There are some fundamental similarities between the two, but there are also several big aspects that separate them, including: 

1. Holding period 
2. Origin of returns
3. Risk

1. Holding Period

Growth equity investments tend to have a lower holding period, on average, than venture capital investments. This is because growth equity is focused on mature, established companies, while VC can target companies in their early stages of development. 

2. Origin of Returns

The main origin of returns with growth equity investments is the company's growth and scaling potential, whereas VC investments make money through the launch or offering of a company's products or services. 

3. Risk

Venture capital deals can be very risky, whereas growth equity is seen as a more moderate-risk level of investment class. This is because, with growth equity investing, the companies being targeted are already established and have already proven themselves to be stable.

6 More Investment Terms to Know When Starting Out 

Entrepreneurs should learn what they can about growth equity, private equity, and venture capital funds before seeking out investments themselves. These additional terms will set you up to engage in the conversation:

• Alternative Investments: investments made outside of traditional options such as stocks, cash, and bonds. Alternative investments may include private equity, real estate, hedge funds, and cryptocurrency.
• Asset Class: a type of investment with similar rules and regulations governing how holding and transactions should be handed — these categories include fixed income, equities, real estate, and cash.
• Initial Public Offering (IPO): businesses becoming public companies launch public stocks for the first time by selling shares at an initial price to mark their entrance into public markets
• Limited Partners (LPs): investors that contribute financially to a company in exchange for a portion of profit, but LPs aren’t involved in business operations or decision-making
• Liquidity: the availability of cash or liquid assets at a company
• Valuation: an official estimation of what a company is worth, commonly determined by multiplying a company’s share price by the number of existing shares

Growth Equity and Private Equity Are Distinct

It's clear that growth equity and private equity may have some things in common, but are very distinctly different from one another.

Private equity firms (PE firms) invest in high-growth businesses to command controlling stakes in companies to as a means of profitability. For this reason, leveraged buyout (LBO) investments are much more common in private equity funds than growth equity funds.  

Growth equity firms focus on revenue growth with their portfolio companies, seeking minority stakes in mature companies with established track records in need of restructuring or expansion. This creates a lower risk while still providing the growth rate for growth equity investors to profit from.

Venture capital firms seek small businesses and startups with long-term growth potential as their investment strategy. Venture capitalists take on more risk than growth or private equity investors, but are able to jumpstart company growth, product development, and influence business models or management teams. 

Growth equity is a very particular part of the private equity world, while also bringing in benefits from venture capital investing too, aiming to offer the best of both worlds for firms and investors.