Growth capital is a type of private equity

Private equity

Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....

 investment, most often a minority investment

Minority interest

Minority interest in business is an accounting concept that refers to the portion of a subsidiary corporation's stock that is not owned by the parent corporation...

, 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.

Companies that seek growth capital will often do so in order to finance a transformational event in their lifecycle. These companies are likely to be more mature than venture capital

Venture capital

Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...

 funded companies, able to generate revenue and operating profits but unable to generate sufficient cash to fund major expansions, acquisitions or other investments. Because of this lack of scale these companies generally can find few alternative 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, and new product development. Growth capital can also be used to effect a restructuring of a company's balance sheet, particularly to reduce the amount of leverage (or debt)

Leverage (finance)

In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...

 the company has on its balance sheet

Balance sheet

In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...

.

Growth capital is often structured as either common equity

Stock

The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...

 or preferred equity

Preferred stock

Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument...

, although certain investors will use various hybrid securities

Hybrid security

Hybrid securities are a broad group of securities that combine the elements of the two broader groups of securities, debt and equity.Hybrid securities pay a predictable rate of return or dividend until a certain date, at which point the holder has a number of options including converting the...

 that include a contractual return (i.e., interest payments) in addition to an ownership interest in the company. Often, companies that seek growth capital investments are not good candidates to borrow additional debt

Debt

A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...

, either because of the stability of the company's earnings or because of its existing debt levels.

Providers

Growth capital resides at the intersection of private equity

Private equity

Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....

 and venture capital

Venture capital

Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...

 and as such growth capital is provided by a variety of sources. While there are a number of dedicated growth capital firms

Private equity firm

A private equity firm is an investment manager that makes investments in the private equity of operating companies through a variety of loosely affiliated investment strategies including leveraged buyout, venture capital, and growth capital...

, growth capital investments are also made by late-stage venture capital investors as well as more traditional buyout firms

Leveraged buyout

A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...

. Particularly in markets where debt is less available to finance leveraged buyout

Leveraged buyout

A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...

s or where competition to fund startup businesses is intense, growth capital becomes an attractive alternative.

See also

• Private equity
  Private equity
  Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
  
  
• Venture capital
  Venture capital
  Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...
  
  
• Mezzanine debt
• Hybrid security
  Hybrid security
  Hybrid securities are a broad group of securities that combine the elements of the two broader groups of securities, debt and equity.Hybrid securities pay a predictable rate of return or dividend until a certain date, at which point the holder has a number of options including converting the...
  
  
• Convertible bond
  Convertible bond
  In finance, a convertible note is a type of bond that the holder can convert into shares of common stock in the issuing company or cash of equal value, at an agreed-upon price. It is a hybrid security with debt- and equity-like features...
  
  
• Preferred stock
  Preferred stock
  Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument...
  
  

External links

• Bridging the finance gap: next steps in improving access to growth capital for small businesses. HM Treasury, December 2003.
• "What is Growth Capital?", Industry Canada
• "Private equity and venture capital." AltAssets, 2003.
• "The role of the venture capital provider." AltAssets, 2002.
• "An overview of the venture capital industry." AltAssets, 2002.