Key Takeaways

  • Growth capital involves investing in established companies who are poised for accelerated growth
  • Target companies are usually still founder-owned and have little to no debt
  • Growth capital investors generally seek to take a minority stake in the companies they invest in rather than trying to buy them out completely

What is growth capital?

Growth capital – also known as growth equity – involves investing in established companies with proven business models and financial track records which are looking to accelerate growth by expanding operations, entering new markets, or acquiring another company.

The companies attractive to growth capital investors are generally still founder-owned and have little or no debt. As established businesses with promising revenue-and profit-generating prospects, growth capital investors stand to benefit from their strong growth potential. For the most part, growth capital investors look to take a minority stake in such companies rather than buying them out completely.

Growth capital investors and managers typically invest in sectors that are likely to exhibit faster growth than other sectors. Industries that have attracted the most growth capital are technology, healthcare, consumer, and financial businesses.

These investments' risk profile are generally considered moderate compared to venture capital because the businesses have established products, existing customers, and a performance track record.  However, in any investment, there are inevitably risks. In growth capital, these are predominantly related to the business's management and the execution of the growth strategy.

What are the advantages of investing in growth capital?

Potential For Growth

Investors stand to benefit from the strong growth potential of these companies because they are established businesses at growth inflection points. The funding from investors provides the capital needed to expand, launch new products or services or otherwise take their businesses to the next level.

Moderate Risk

Growth capital investing has a lower risk profile compared to venture capital investing because it involves investing established businesses that have attractive growth prospects. These businesses are also either debt-free or have minimal debts, which means that any upside growth in revenues or profits can be distributed to investors.

Downside Protection

Growth managers tend to take minority stakes in the target companies but benefit from being at the front of the queue – ahead of management - when paid out for their equity. Comprehensive investor protections can also be embedded in the funding contract, which includes the governance of the business. These provisions minimise the downside risks to investors.

Minimal Debt

Companies that attract growth capital are largely unencumbered by debt obligations. That gives management more flexibility to adapt to changing market conditions and withstand business challenges.

What are the disadvantages?

Execution Risk

Growth capital investment returns are contingent on the growth strategy being executed successfully. Thus the risk of the business plan failing is arguably the most significant risk confronting investors. Growth strategies are often ambitious and subject to many moving parts to reap the desired gains in revenues and profits. Among the execution risks are when a company is transitioning to a new technology that could be disruptive to the existing one, that a new product may not live up to expectations, and when an acquisition proves difficult to integrate into the original business.

Management Risk

When a company moves from business-as-usual into a period of attempted transformational growth, staff, operational infrastructure, and many other other aspects of the business are likely to change significantly. Thus the quality, experience, and skills of the management team in charge are crucial if that growth is to be realized.

Elevated Valuations

Due to increased interest in growth equity investing, it has become more expensive to invest in companies with attractive growth potential. According to Cambridge Associates, the average purchase price multiple for growth equity investments has increased more than 75% over the 2010 to 2017 period. Thus investors need to consider the price they are willing to pay if they want to unlock the type of growth they are targeting.

Who can invest in growth capital?

In Singapore, at least, investing in growth capital has been inaccessible to all but institutional investors and the extremely wealthy. ADDX democratises growth capital by making it available to investors for as little as S$10,000 to invest in primary offerings and as little as S$100 to trade.

To qualify as an ADDX investor, investors need to meet one or more of the following conditions:

•Yearly income of at least S$300,000 or

•Net financial assets of at least S$1,000,000 or

•Net total assets of at least S$2,000,000

The bottom line

Growth capital involves investing in established companies who are poised for accelerated growth. Because it focuses on established companies with proven business models and financial track records, it is generally considered less risky than private equity.

ADDX is your entry to private market investing. It is a proprietary platform that lets you invest from USD 10,000 in unicorns, pre-IPO companies, hedge funds, and other opportunities that traditionally require millions or more to enter. ADDX is regulated by the Monetary Authority of Singapore (MAS) and is open to all non-US accredited and institutional investors.