As other economic factors continue to stabilize after devastating drops during the early aughts, trends in private equity investment continue to trend up slowly over time. Venture capital investments, for example, rose from around $15.59 billion in the United States in 2002 to approximately $71.94 billion in 2017. Typically, these are investments in startups and young, innovative brands, but larger target companies also continue to see investor interest. In these cases, it's more likely specialty investors with the right resources are interested in providing either growth capital or buyout capital.
Growth Capital v. Buyout Capital
At a basic level, the differences between growth capital and buyout capital are obvious in the names. Growth capital is typically invested to foster growth -- possibly out of a stagnant or troubled financial situation -- for the target company. The investors reap rewards via returns from guaranteed dividends, stocks or the future sell of shares once the company is performing better.
Buyout capital, on the other hand, typically involves a controlled takeover. The investors, or the entities backed by the private equity firm, acquire ownership by buying controlling interest in the organization. Typically, the use of buyout capital is followed by reorganization that positions the target company to be more profitable. Restructuring might include cost-cutting and process improvement or dismantling and selling certain parts of the organization considered to be loss-makers. The goal for investors is usually to flip the shares for a future profit once the business goes public in an IPO or sees substantially improved performance in the market.
Which Is the Better Option?
On the surface, growth capital might seem like the best option for the target company and the riskiest venture for the private equity investor. In reality, both types of capital come with risks and rewards for either side.
Growth capital is good for a target company that is simply floundering and needs help to charge the market. It lets management and owners retain a lot of control, and it helps them position their brand for future success. For the investor, growth capital in a brand with strong potential can be very rewarding, but since control remains with others, most private equity investors minimize the amount of their portfolio tied up in growth capital at any given time.
Buyout capital can still be good for a brand, although current owners and leadership must relinquish control or even affiliation with the target company through the process. The exact nature of the transfer varies with each acquisition. Ultimately, buyout capital is a good option when a company has reached a point where major changes are required to move forward; buyout capital can save a brand and even many of the jobs associated with it. For the investor, buyouts can represent substantial returns or equally substantial losses, which means equity firms and investors are unlikely to enter into many such endeavors at one time.
Understanding the various types of investment approaches taken by private equity firms is just one step businesses can take if they want to attract those investors. Target companies may need to do some internal house cleaning and other work before they can partner with the right private equity investor, especially when turning to growth capital as a way to bolster future success.