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Growth capital (also calledexpansion capital andgrowth equity) is a type ofprivate equity investment, usually aminority interest, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a significant acquisition without a change of control of the business.[1]
Companies that seek growth capital are often small, rapidly growing, and their assets are oftenintangible.[2] They will often do so to finance a transformational event in their lifecycle. These companies are likely to be more mature thanventure capital funded companies, able to generate revenue and profit but unable to generate sufficient cash to fund major expansions, acquisitions or other investments.[3] Because of this lack of scale, these companies generally can find fewalternative conduits to secure capital for growth, so access to growth equity can be critical to pursue necessary facility expansion, sales and marketing initiatives, equipment purchases, andnew product development.
Growth capital can also be used to effect a restructuring of a company's balance sheet, particularly to reduce the amount ofleverage (or debt) the company has on itsbalance sheet.
Growth capital is often structured aspreferred equity, although certain investors will use varioushybrid securities that include a contractual return (i.e., interest payments) in addition to an ownership interest in the company.[4] Often, companies that seek growth capital investments are not good candidates to borrow additionaldebt, either because of the stability of the company's earnings or because of its existing debt levels.
Growth capital resides at the intersection ofprivate equity andventure capital and as such growth capital is provided by a variety of sources. The types of investors that provide growth capital to companies span a variety of both equity and debt sources, including private equity and late-stage venture capital funds,family offices, sovereign wealth funds, hedge funds,Business Development Companies (BDC), and mezzanine funds.[5] Growth capital investments are also made by more traditionalbuyout firms. Particularly in markets where debt is less available to financeleveraged buyouts or where competition to fund startup businesses is intense, growth capital becomes an attractive alternative.
Growth equity investments, as defined by the National Venture Capital Association,[6] feature the following:
