The rising interest in private markets has not only made 2021 the first trillion-dollar year for the industry, it’s also driven growth capital to new heights.
Growth capital funds have historically been “defined by relatively small pools of capital,” according to the latest PE Pulse report from Ernst & Young. In 2021, however, growth funds raised a record $102 billion, up 53 percent from a year before and up 74 percent from the average of the previous five years, according to the EY report.
Brian Dudley, partner at the Chicago-based asset manager Adams Street, told Institutional Investor that “growth equity” is a very loosely defined term. “You might get ten different answers from ten different [investors],” he said. He added, however, that there is one thing that most investors can agree on: The private market landscape is no longer only dominated by venture capital firms focusing on Series A funding and mega-buyout funds that are focused on late-stage firms. Players on both sides have begun to explore opportunities in mid-stage companies, which has helped double the value of the growth segment over the past five years, Dudley said.
The fundraising record in growth capital was due in part to the upward trend in the broader private equity market. In 2021, PE deal value reached $1.2 trillion, up 96 percent from the previous year. It was also the first time that the PE industry crossed the $1 trillion milestone, according to the EY report. More than half of the private equity capital was invested in technology and consumer companies, which account for 30 percent and 24 percent, respectively, of aggregate PE deals by value. Sectors like healthcare, industrials, and materials also saw positive capital inflows from private equity firms.
“The very large blue-chip private equity funds have raised an enormous amount of capital over the last five to ten years, which means [there exists] undeployed capital at this point in time,” Dudley said. “They are looking for additional areas to deploy that capital, so there’s certainly the spillover effect.” The fact that companies are staying private longer than ever has also prompted hedge funds and mutual funds to jump into opportunities in growth equity, Dudley added.
Another key factor driving the surge is the fundraising success of major growth capital managers. “TA Associates, for example, closed on $12.5 billion in commitments for its fourteenth fund after raising $8.5 billion just two years earlier,” the report said. Other notable rounds of fundraising in growth equity include those by Summit Partners and General Atlantic, which raised $8.4 billion and $7.8 billion, respectively, in the second half of 2021.
Traditional buyout firms, which have historically targeted companies in the late stages, have moved into growth-stage firms. In March, Blackstone closed its inaugural growth equity fund with $4.5 billion raised from a wide range of institutional investors, including family offices, endowments, and pension funds. It was the “largest first-time growth equity vehicle in history,” according to Blackstone. The PE giant aims to “reimagine growth equity investing” by focusing on a “far more curated number of companies than what is typical of growth equity firms.”
“In an environment where even mediocre businesses are commanding top dollar, growth equity investments are increasingly compelling, offering investors the potential to grow their way out of elevated entry pricing over time,” the report said. “For firms that have invested heavily in operational capabilities, applying those resources to the highest potential opportunities can often yield outsized ROIs (return on investment) relative to traditional buyouts.”