It is one of the hottest topics in private equity. Where do the new untapped opportunities for growth lie? Some introductory questions to expect in all growth equity interviews are: For each, it would be best to personalize your responses to fit the funds investment strategy and industry focus. In essence, you buy a company, grow it quickly, and then flip it to the next fool (!) For example, suppose the stakeholders with majority ownership desire to sell the company to a strategic, but a few minority investors refuse to follow along (i.e., drag-along the process). Which factors make the business model and customer acquisition strategy more repeatable to facilitate increased scalability and becoming profitable someday? Good luck. Furthermore, interest in a certain industry can lead to much better performance on the job (e.g., cold calling outreach, networking at industry conferences, contributing at internal firm meetings). Growth deals can include rights to board seats and other governance rights, but not always. Therefore, if the investor had put in $1 million with a 2.0x liquidation preference, the investor is guaranteed $2 million back before common shareholders receive any proceeds. Usually, it includes variable costs (e.g. Nov 17, 2020 Growth Equity Interview vivrecap IB Rank: Chimp | 6 Hi Everyone, Have an upcoming interview with a team formed from a TPG Growth spinoff. In this case, the target company might fail to follow its expansion plan. I remember in my own interviews I was once asked, tell me about a time when you demonstrate attention to detail. The anecdote I used was from a job I had in college putting out tables and chairs for an event space (i.e. Omnis molestias sed earum iusto. So, the strategic and operational decisions of the target company remain under the control of the current management and significant shareholders. They acquire a majority or 100% of the target company. GE inherits the advantages and disadvantages of both VC and PE. As an example, Airbnb has this very dynamic. Professionalization of internal processes (ERP,CRM), Market expansion and customer cohort analysis, Business development and go-to-market strategy planning. The typical revenue of the target firms is $3M-$50M. The salary and compensation vary across the regions and countries. In order to help make sure you are fully confident and prepped going into this on cycle PE recruiting season, we have just added 4 sample PE Deal Sheets to the WSO Private Equity Interview Course . Get instant access to video lessons taught by experienced investment bankers. The typical holding period of VC investments is 5-10 years, the IRR is 35-50%, and the exit multiple is 5-10X. top of your class of 2,000 students, elected to study government president). You are the flag bearer for the firm and will talk to thousands of CEOs so this part is super important. The reason is that the portfolio company has already proven its product's market demand and cannot borrow more debt. Unlike LBO buyouts, growth investments are typically minority ownership stakes (e.g. Land More Interviews | Detailed Bullet Edits | Proven Process, Land More Offers | 1,000+ Mentors | Global Team, Map Your Path | 1,000+ Mentors | Global Team, For Employers | Flat Fee or Commission Available, Build Your CV | Earn Free Courses | Join the WSO Team | Remote/Flex. Thanks for this. Some of the leading pure-play growth equity funds include: However, there tends to be significant overlap at most firms; many buyout or venture-focused firms will have separate growth equity funds. The liquidation preference of an investment represents the amount the owner must be paid at exit (after secured debt, trade creditors, and other company obligations). A managing director at General Atlantic once told me that growth investing was very simple all you had to do was look out for the 3Ms: Clearly, the 3Ms dont address every factor that can determine the success of an investment. May. Management interaction:Since the growth equity will not have controlling ownership, the interaction with the management team in GE is less than that in PE. Study Resources. Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling. Instead, the GE fund only acquires a minority stake (<50%) in the target firm with equity. TA Associatesis an investment firm founded in 1968. In that case, it might be no longer attractive to the investment fund. Relationship management with institutional investors, bankers, lenders, etc. Often, the liquidation preference is expressed as a multiple of the initial investment (e.g., 1.0x, 1.5x). In the capital structure, preferred stock sits right above common equity, but has lower priority than all types of debt. Does management have a plan for how they intend to use the proceeds from the investment? The following two sections discuss the differences between GE and other investment strategies in terms of multiple metrics, investment philosophies, and the target companies. Unlike the VC fund, the GE fund looks to the scalability potential of target companies. Nevertheless, the risk of failure is much lower in GE. In comparison to recruiting for investment bankingor private equity, the process for growth equity recruiting tends to resemble that of venture capital the process is less structured and the chances of receiving an off-cycle offer are higher. The fund will also check whether the target firm meets the minimum growth threshold. In this article, I will discuss the major categories for growth equity interview questions, and I will provide specific examples of questions and answers, where possible. The company may or may not be profitable, but it has proven its business model. Keen on working with deals in private markets, Interested in investing, operations, and using critical thinking to boost the firm's growth, Persistent working on long-term projects (building a portfolio company over the years), Open to non-deal work (company operating and underwriting). However, some firms might have even 4-5 interview rounds for candidates. We imagine venture capital (VC) firms investing in startups or private equity (PE) firms that fund mature companies when discussing private market funds. The GE fund uses minimum or doesn't use debt to invest in target companies. Additionally, growth investments are almost always made in the form of preferred equity and structured with protective provisions for preferential treatment, as well as redemption rights. Instead, theres just a proposed idea for a certain product, technology, or service, The commercialization stage typically refers to the Series C to D (and beyond) funding rounds, and there are usually several large, institutional venture firms and growth equity firms involved, Thus, its difficult to raise much capital; however, the amount of funding required is usually very minimal since its only meant to build a prototype and see if this idea is feasible in terms of product-market fit, Here, the role of the capital and the firm is to guide the company experiencing high growth to get past the inflection point by helping refine the product/service offering and the business model, At this stage, the investors providing this type of seed investment are usually friends, family, or angel investors, The commercialization stage is when the value proposition of a startup and the possibility of a product-market fit have been validated, meaning institutional investors have been sold on this idea and contributed more capital, The focus at the proof-of-concept stage is validating the idea with the goal of showing this potential to outside investors to raise capital, Especially in highly competitive industries (e.g., software), the focus shifts almost entirely to revenue growth and capturing more market share, as profitability is not the priority, Growth equity investors take minority stakes in high-growth companies attempting to disrupt a particular industry, Buyout funds care most about the defensibility of the cash flows of the LBO target, which means they like stable industries with minimal disruption risk, For growth-oriented investors, differentiation is a major factor and often the leading rationale for investing (i.e., the value of a product increases from being proprietary and difficult to replicate, or protection from the patent), The use of high levels of debt is one of the key drivers of returns in a leveraged buyout, which forces the PE fund to be more risk-averse and constrains the type of industries they invest in, Debt is not used by growth equity firms or used very sparingly (and most often in the form of convertible notes), Horizontal software companies provide complete, all-encompassing solutions for their customers, which can be used across a broad range of industries (e.g., Office 365, Salesforce CRM, QuickBooks), Vertical software companies target specific niche segments and many can redefine their target industries to meet the needs of underserved markets, In effect, horizontal software providers have more potential revenue based on the total addressable market (TAM), If a vertical software company comes in with a product that adds meaningful value, it can quickly establish itself as the industry leader, Most horizontal companies have time to adjust their strategy as larger markets take more time to saturate; thus, these companies can pivot and narrow their target customer over time based on which end markets are most profitable, Once market leadership is established, the company can then create a tailored suite of solutions based on their understanding of their end markets specific challenges and needs thereby, such companies experience lower rates of customer churn and can incur fewer sales and marketing expenses, SaaS tends to consist of winner takes all markets and only a few companies will end up dominating a market as they become the standard products used across most industries, By specializing in a particular market, the company is making a high risk-high return bet that it can gain sufficient traction in this focused segment, Higher rates of churn are seen here as horizontal software companies are better funded and many can afford to offer more features and strategies (e.g., freemium), Many of the targeted markets are neglected for valid reasons such as technical hurdles, lack of market demand, specialization requirements, and research & development costs, Due to the increased competition in horizontal software markets, which tends to be more cut-throat, sales and marketing spend is generally higher given the extensive number of potential customers and the competitive race for customer acquisitions, The potential revenue might not justify the expenses and level of risk that is undertaken, Even if the company becomes a market leader, growth opportunities can eventually diminish and force the company to pursue expansion into adjacent markets, making the gap between sales and marketing spending narrow at scale. Well, heres one example with many things growth investors look for: With this backdrop, I recommend candidates prepare 1-3 market pitches before interviews. Venture Scouts: Tell me what I have wrong. That is crucial for traditional PE funds. As discussed previously, business model is one of Ms in my 3M framework for what makes a great growth investment. Recently went through on-cycle for growth equity Associate positions so I can chime in here. This guide is only for those people take their growth equity and late-stage venture capital, or private equity interviews extremely seriously. So the partnership between the investment fund and the portfolio company is based on confidence in the management team and that the management team will keep its strategic direction. far in the future). 08. General Atlanticis an international firm founded in 1980 by Chuck Feeney. View 529980509-WSO-Private-Equity-Prep-Package-pdf.pdf from SMG FE 450 at Boston University. Welcome to Wall Street Prep! However, most growth investments have yet to become net margin profitable and the cash flows generated are not predictable like those targeted by LBO funds (i.e., not capable of handling a highly levered capital structure). 2023 Wall Street Prep, Inc. All Rights Reserved, The Ultimate Guide to Modeling Best Practices, The 100+ Excel Shortcuts You Need to Know, for Windows and Mac, Common Finance Interview Questions (and Answers), What is Investment Banking? In addition, those divisions provide targeted strategic consulting, assistance structuring, and financing transactions. Interviews were very heavy behavioral. Recusandae magni tenetur id quis sed sint. In addition, the target firms have an excellent track record of cash generation. At a minimum, make sure you have stories and answers prepared for the following, which seem to be asked with the most frequency in growth equity: While investment skills and instincts can be learned or sharpened, usually firms look for candidates with a base level of investing knowledge already. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Unlike venture capital and buyout, growth equity is an appealing form of investing to many prospective applicants because it offers the chance to invest in businesses that are fast-growing AND are established enough to allow quantitative analysis and financial modeling during diligence. Ideally, youve picked companies operating in great markets for your stock pitches and sourcing exercise. Growth equity investments involve: Minority Stakes (i.e., < 50%) Using No Debt (or Minimal) Debt Those two risk-mitigating factors help diversify the portfolio concentration risk while reducing the risk of credit default by avoiding the use of financial leverage. Enroll in The Premium Package: Learn Financial Statement Modeling, DCF, M&A, LBO and Comps. Other funds recruit off-cycle. Unlike VC investing, where it is widely expected that the majority of investments will fail, companies that reach the growth equity stage are less likely to fail (although some still do). Growth Equity - 2023 1st Year Associate Comp Discussion, 101 Investment Banking Interview Questions, Certified Private Equity Professional - 1st Year Analyst, Financial Modeling & Valuation 2-Day Bootcamp OPEN NOW - Only 15 Seats, Venture Capital 4-Hour Bootcamp - Sat April 1st - Only 15 Seats, Excel Master 4-Hour Bootcamp OPEN NOW - Only 15 Seats, Venture Capital 4-Hour Bootcamp - Sat May 20th - Only 15 Seats. That means that if the business faces challenges in the future (as most do, at some point) this can have an outsized negative effect on the valuation today. However, if the potential portfolio company doesn't fit into one of those criteria, the fund will decline to invest. Even if a company could grow quickly, if they require lots of funding to fuel each new leg of growth, you will want to be cautious as an investor since the company may require more new capital to scale, which will decrease your return by dilution. The more departments the company has, the more managers it must assign. Growth Equity is defined as acquiring minority interests in late-stage companies exhibiting high growth, in an effort to fund their plans for continued expansion. There are two types of recruiting in GE: The on-cycle recruiting starts in July and ends in October for analyst positions. Since the associate is usually the first person to reach out to the management team of a prospective investment, he or she often serves as the firms first impression. They also target the planned allocation of the cash proceeds into re-investment, unfunded growth opportunities, etc. Most of the time spent on interaction with the management team and bankers, financial modeling, and due diligence will go straight to sourcing and market research. As a result, the GE funds expect to get positive returns from their investments with no risk of losing the majority of their portfolio. However, if you get all three of these right, it is highly likely you will have a very successful growth investment on your hands. That's why the only thing they can rely on is trust. Corporis neque ipsa aliquam quas voluptatem. Yes, Airbnb must eventually payout the host, but the negative working capital dynamic gives Airbnb more cash flow flexibility and efficiency, such that each time the company invests in growth (e.g. It can be very beneficial to have interest areas that overlap with the focus of the fund, on top of having the proper soft skills to represent the firm. But you wanted the broadest possible deal experience and industry exposure, as well as more refined modeling and valuation skills, so you decided to do investment banking first. In your history with Growth Interviews have they asked any of the following? investor money that has yet to be used) currently on the sidelines. The investment firm has 14 offices in five regions: United States:New York, Palo Alto, and Stamford. Generally, growth rounds occur after early stage venture investments, but before IPO. The investment horizon is 2-5 years, the IRR is 25-35%, and the exit multiple is 2-5x. lucky_menace O. Its very important for firms to screen for fit because in growth equity, junior investment professionals are often on the front lines representing the firm when meeting new investment targets. The off-cycle option is for those positions in small GE funds and need-based positions for bankers. Growth equity (GE) is a type of private equity that focuses on investing inlate-stagegrowth firms that need to scale their businesses. However, redemption rights are rarely exercised, since most of the time, the company would not have sufficient funds to make the purchase even if legally required to do so. That is very helpful for the growing company to scale faster. Summit Partners invested in over 500 companies in technology, healthcare, consumer, e-commerce, and financial services. Here the interviewer is testing your general awareness and research into what youre interviewing for. Growth equity (GE) is a type of private equity that focuses on investing in late-stage growth firms that need to scale their businesses. first analyst to be picked for X honor in their first year), or only (e.g. However, the fund cannot interact with the operations given that it's one of the minority shareholders and might lose investments. Did not come close to any other PE, IB, PERE or VC interview I've done but pulled small elements from all of these industries. That makes the fund quite similar to the venture capital fund, which provides capital and expertise to the portfolio companies. The GE funds make decisions on these defined and quantifiable foundations: Target market and customer profile identified. A redemption right is a feature of preferred equity that enables the preferred investor to force the company to repurchase its shares after a specified period. Dicta reprehenderit corporis soluta minima quia tempora. The only possible risks are execution risk and management risk. Here, the objective is more related to riding the ongoing, positive momentum and taking part in the eventual exit (e.g., sale to strategic, Initial Public Offering). On the other hand, there are other companies that receive growth investments that are very profitable and have great margins. Also, check out the above question where I discuss how to determine whether a company is a candidate for growth investment (3Ms). //