Growth Equity: The Child Prodigy of Private Equity and Venture Capital, or an Artifact of Easy Money?

Over the past few decades, growth equity (GE) has gone from an afterthought to a major asset class for huge investment firms.

Some argue that GE offers the best of both worlds: the opportunity to fund innovation and growth – as in venture capital – plus the ability to limit downside risk and invest in proven companies – as in private equity.

Others would counter that growth equity’s rapid ascent was mostly due to the easy money that persisted between 2008 and 2021.

With interest rates at ~0%, funds inevitably flowed into anything with “growth” in the name – regardless of its real growth potential:

What is Growth Equity?

Growth Equity Definition: In traditional growth equity, firms invest minority stakes in companies with proven business models that need the capital to expand; some firms also use “growth buyout” strategies, which are like traditional leveraged buyouts but with higher growth potential.

Most of the confusion around “growth equity” comes from the fact that it includes two different strategies, and many top firms use both.

Here are the main differences:

1. Strategy #1: “Late-Stage Venture Capital” – This is what most people think of as “growth equity.” This style is about purchasing minority stakes in cash-flow-negative-but-high-growth companies that want to scale and eventually go public or sell (think: Uber or Airbnb before their IPOs). Valuations are high, the returns depend on future growth, and deals are for primary capital, i.e., new cash the business needs. There’s usually a long list of previous VC investors as well.
2. Strategy #2: “Growth Buyouts” – This strategy is more like traditional leveraged buyouts because the PE firm acquires a much higher percentage of the company (or even majority control). Most companies are already profitable, the potential returns are lower, and there’s usually a large secondary component (i.e., the Founders sell some shares to take money off the table, but “the company” doesn’t get any of that cash). Debt financing is much more common, and the GE firm is often the first institutional investor.

Over time, many traditional growth equity firms have shifted to the “growth buyout” category as their assets under management have grown.

Most of this guide deals with the “late-stage VC” strategy, as dozens of other articles cover private equity strategies such as leveraged buyouts and traditional private equity.

The Top Growth Equity Firms in Each Category

If you asked the average person to name the “top” growth equity firms, you’d probably get a list like the following:

But there’s a bit more subtlety because these firms operate in different categories:

1) Primarily Late-Stage VC Deals – Examples include a16z Growth, Battery, Bessemer, Sequoia Growth, and Technology Crossover Ventures (TCV).

Most of these firms started out doing early-stage VC deals and still invest across all company stages.

2) Primarily Growth Buyout Deals – Firms like Accel-KKR, Great Hill, Mainsail, PSG, Spectrum, and TA Associates go here.

Many of these firms use debt to fund deals, and they complete bolt-on acquisitions for portfolio companies.

3) Mix of Late-Stage VC and Growth Buyout Deals – General Atlantic, Insight, JMI, Stripes, and Summit are good examples.

4) Private Equity Mega-Funds with Growth Teams – TPG Growth is the most famous example, but you could also add the growth teams at Advent, Bain, Blackstone, Permira, Providence, and Warburg Pincus (note that these are not all “mega-funds” according to our definitions).

You could keep going and add plenty of names.

For example, Susquehanna Growth Equity is another great firm, but it doesn’t use the traditional LP/GP structure, so I’m not sure where it fits in.

Similarly, SoftBank has played a big role in growth equity (for better or worse…) but it’s the investing arm of a corporation, not a standalone PE/VC firm.

Many other well-known VCs have also raised growth equity funds, including Benchmark, Kleiner Perkins (KPCB), and NEA.

Why Did Growth Equity Get So Popular?

The main factors were:

1. The Rise of Tech and Software – Since so many growth equity deals involve technology, the sector’s rise over the past 10 – 20 years also drove a lot of growth equity investing.
2. Companies Began Staying Private for Longer – A long time ago, startups went public within a few years of raising VC funds (see Google, Cisco, etc.). In the 2010s, startups began to postpone their IPOs, but they still needed funding.
3. Tech Industry Maturation – As the technology industry matured, companies generated more predictable cash flow, but they still needed capital to scale.
4. Loose Monetary and Fiscal Policy – The quantitative easing (QE) and zero-interest-rate policies (ZIRP) that existed in most countries between 2008 and 2021 spurred a lot of “growth investing,” as established/sleepy firms like Fidelity suddenly became interested in riskier investments. Many hedge funds also joined the party.

From a career perspective, growth equity appealed to many bankers and consultants who didn’t want to be “pigeonholed” in venture capital (limited exit opportunities) or suffer through “banking hours” once again in private equity.

Growth equity offered a compromise: Modeling and deal work, networking, and shorter hours than most PE roles.

Growth Equity vs. Venture Capital vs. Private Equity

This section will focus on Strategy #1 (Late-Stage VC Investing) because Strategy #2 is nearly the same as what most middle-market private equity firms do, but with higher-growth companies.

Official descriptions usually cite the following points to explain how growth equity firms differ from VC and PE firms:

• They acquire minority stakes in companies (like VC and unlike PE).
• They invest in revenue-generating companies with proven business models (like PE and unlike early-stage VC).
• They aim for cash-on-cash multiples between 3x and 5x rather than the 5x, 10x, or 100x that VCs target and the 2x – 3x that many PE firms target. The targeted IRR might be in the 30 – 40% range.
• They earn returns primarily from growth via acquisitions and organic sources.
• They do not use debt since they only make minority-stake investments. However, they often invest using preferred stock with liquidation preferences attached to limit their downside risk (similar to VCs).
• The average deal size is bigger than early-stage VC but smaller than many PE deals; the $25 – $500 million range might be the norm for U.S.-based firms.
• The main risk factor in deals is executing the growth plan, not default risk due to debt (PE) or product/market risk (VC).

Growth equity firms could invest in any industry but tend to be skewed toward technology and TMT, with some exposure to consumer/retail, healthcare, and financial services.

The specific growth strategies used by portfolio companies could include almost anything, but a few common ones are:

• Paying for employees, buildings, and equipment to enter new geographies or markets.
• Developing new products or services.
• Scaling a company’s sales & marketing by hiring more sales reps.
• Completing bolt-on acquisitions that will boost the company’s revenue and cash flow.

On the Job: Growth Equity Careers

Unsurprisingly, growth equity careers are a mix of private equity careers and venture capital careers.

Let’s run down the average tasks an Analyst or Associate completes each day at a “Late-Stage VC” firm to demonstrate this:

• Sourcing: As in VC careers, there’s a lot of emphasis on “sourcing” or finding new companies to invest in (read: cold calling and emailing). Deals and business strategies are less complicated than in PE, so finding great companies is a competitive advantage.
• Financial Modeling: Like private equity, 3-statement models are common, as are valuations and DCF models, but LBO models are less common since not all deals use debt. Like venture capital, cap tables, liquidation preferences, and primary vs. secondary purchases come up frequently (plus, SaaS metrics, SaaS accounting, and so on).
• Portfolio Companies: You probably won’t interact with management teams quite as much because your firm won’t own controlling stakes in all its portfolio companies. You may still help with operational issues, but it’s harder to “force” companies to change in a specific way.
• Due Diligence: For similar reasons – minority stakes rather than control deals – you won’t devote quite as much time and effort to due diligence in deals.

If you do the math, you’ll see that something doesn’t add up because the modeling, deals, and due diligence are less intense than in PE, but you also work longer hours than in VC (50 – 60 hours per week up to 70 – 80 when a deal is closing).

What accounts for the difference?

At some firms, the answer is “a lot more sourcing.”

But at other firms, you might spend more time on market/industry research or get more involved with portfolio companies.

The overall career path, tiles, and promotion times are like the private equity career path, but compensation is usually lower (see below).

Growth Equity Recruiting: Who Gets In, and How Do They Do It?

The recruiting differences vs. other fields of finance are as follows:

1) Candidate Pool: Growth equity is open to a wider pool of candidates than PE roles, but not as many as VC roles. Many people still get in from investment banking and management consulting, but some also get in from VC and finance-related jobs at startups. Also, you can get in more easily from a middle-market or boutique bank.

That said, you are still highly unlikely to win growth equity offers from something like engineering at a tech company or brand advertising.

Even product management is questionable – it can work for VC roles, but probably not for GE since you need more technical skills.

Finally, you can get into GE directly out of undergrad, but it’s less common than in IB/PE, and it’s not necessarily recommended because many of these roles are “sourcing heavy.”

2) Process: At most firms, the process is closer to off-cycle private equity recruiting, where you must proactively network to find roles. The biggest GE firms and the PE mega-funds still use on-cycle recruiting, but

3) Technical Skills: People often claim that growth equity interviews are “less technical,” but this is not universally true. You could easily get asked to complete an LBO modeling test, a 3-statement model, or a DCF, and standard IB interview questions and VC interview questions could come up.

Obviously, you’ll need these technical skills if you join a team that does “growth buyout” deals.

But even if you apply to a late-stage VC team, they might still give you a modeling test to weed out candidates.

Growth Equity Interviews and Case Studies

The main question categories in interviews are:

• Fit/Background – Expect to walk through your resume, explain “why growth equity,” why this firm, your strengths and weaknesses, and so on.
• Technical Questions – Everything is fair game (see above).
• Deal/Client Experience – You should review your 2-3 best deals and say whether you would have done each one, with “growth” as the key criterion.
• Firm/Portfolio Knowledge – You need to know the firm’s investment thesis, strategies/verticals, and have a rough idea of its portfolio companies. To save time, focus on 1-2 specific companies and do enough research to discuss them in-depth.
• Industry/Market Discussions – Rather than trying to “learn” the entire SaaS, AI, or hardware market, focus on one specific vertical (e.g., the top 2-3 companies, your #1 investment pick, the growth drivers, the risk factors, and the overall outlook).
• Mock “Sourcing” Calls – The firm could also ask you to role-play a call with a prospective portfolio company by introducing yourself, asking key questions, and requesting a follow-up conversation.
• Case Studies – Most GE case studies are either 3-statement modeling variants or open-ended market-research case studies, but anything is fair game (paper LBO models, simplified or full LBO models, etc.).

An open-ended case study might give you a few pages of information on a company and ask you to draft an investment recommendation.

To do this, you will have to research the company’s market size, competitors, growth strategies, and strengths/weaknesses.

We don’t have a direct example here, but the VC case study on PitchBookGPT gives you a flavor of what to expect in a qualitative case.

For a modeling example, see our growth equity case study based on Procyon SA.

Compensation and Exits

These two points depend on whether you worked on growth buyouts or late-stage VC investments.

In growth buyout teams/firms, compensation at larger firms is generally a 15 – 20% discount to private equity compensation.

So, if an “average” PE Associate earns $300K – $350K in total compensation, the average range might be closer to $250K – $300K at a growth buyout firm.

However, note that the mega-funds might still pay about the same because they may align compensation across groups.

If you work for a smaller, late-stage VC fund, expect compensation closer to normal VC levels (maybe the $200K – $250K range, though it’s hard to find specific data here).

Fund sizes are smaller, portfolio company exits takes more time, and performance is less predictable, all of which account for the lower pay.

On the other hand, some firms pay “sourcing bonuses” if you contact enough companies, and they may offer co-investments in certain details, so there are ways to increase your pay as well.

As far as exit opportunities, you could move into standard private equity if you worked on growth buyouts, but this is much more challenging coming from a late-stage VC role.

Other opportunities include other GE firms, VC roles, startups/portfolio companies, or an MBA.

You wouldn’t be the best candidate for most hedge fund roles (traditional PE is better), but corporate development might be possible, especially if you had IB experience before entering growth equity.

Pros and Cons of Growth Equity and Final Thoughts

Summing up everything above, here’s how you can think about growth equity:

Pros

• It’s more accessible than traditional private equity roles.
• You potentially make a high impact from day one since much of the job involves finding new companies to invest in.
• You work with more “exciting” companies since your goal is to find and accelerate growth.
• Compensation is solid, especially in growth buyout teams, though it is usually a discount to traditional PE (albeit with better hours).
• There’s a good mix of exit opportunities spanning VC, PE, and operational roles.

Cons

• Some firms require extensive sourcing, including pressure to meet specific call targets, which many people do not like.
• You have limited control over portfolio companies due to the minority stakes, which means you can’t necessarily “change” specific things.
• It doesn’t necessarily offer a net advantage over joining a traditional VC or PE firm because each benefit has a drawback (e.g., shorter hours but lower compensation).
• Growth equity is highly cyclical – more so than early-stage VC or traditional PE – since late-stage funding tends to dry up quickly in down markets.

The last two points here are the most serious ones.

Even in a terrible market, plenty of early-stage VC deals still happen because people are always starting companies.

And while PE firms are less active in poor markets, they can still work on their portfolio companies, make add-on acquisitions, and pursue asset sales or divestitures.

By contrast, many growth equity firms get stuck in “no man’s land” because they write large checks but may not have majority control to implement big changes.

Growth buyout teams get around this issue if they do > 50% deals, but in many cases, you’d be better off going to a traditional PE firm first to gain a broader skill set.

If you like it, you can always shift to GE or VC afterward, as it’s much easier than the reverse move.

That said, growth equity can still be great for the right person – if you understand that combining two industries means you get the best and the worst of each one.