Growth equity is when a company uses private equity capital to accelerate its growth and raise the valuation of the company. It is a widely used term in the finance world that refers to any form of capital used to facilitate the growth and expansion of a company. It can consist of a variety of capital forms in a variety of different structures. Its defining feature is the degree to which it is growth generative. Most often growth comes in the form of acquisitions and buyouts.
Below is a list of different growth equity options a company may use:
Mezzanine Financing: Mezzanine capital understands the potential long-term growth of your company. A business that can generate high returns from financing would be the best candidate for a mezzanine loan. Mezzanine financing delivers strong long-term value at a reduced cost than expensive equity financing.
Asset-Based Financing: An asset-based lender creates a structured term loan that is secured by the assets held by the company. There are many different assets that the capital can be loaned against depending on where your company stands in the market. A business with a strong balance sheet, filled with assets would be a perfect fit for an asset-based loan. There is an abundance of prime and sub-prime lenders in this market, broken down by loan size that can help finance your business.
Unitranche Debt: Unitranche debt combines features of both mezzanine and senior debt. This type of financing is useful for companies that cannot obtain the necessary funding from senior debt to complete a transaction. This structure is popular with private equity buy-outs and other acquisition driven scenarios.
Senior Cash Flow Debt: Senior cash flow, or bank term debt, relies on a company’s future cash flows and its underlying collateral value for the loan. Senior cash flow debt is applicable for a business that has a healthy level of cash generation, couple with strong receivable, inventory or equipment value.
Other options: Lines of credit, term loans, preferred equity, and common equity.
As a business progresses through its growth lifecycle, it often requires different forms of growth capital to facilitate its expansion. The determination as to the appropriateness of certain forms of growth capital is a function of the company’s creditworthiness, debt capacity, and magnitude of the growth plan.