Growth equity investments in technology companies are surging.
In terms of investment in tech, growth equity’s share increased from 19 percent in 2017 to 27 percent in 2021, according to the latest annual technology report from Bain & Company, the management consulting firm. The report found that growth equity funds have expanded their presence in technology faster than venture capitalists, buyout funds, and even public investors.
In the past five years, both venture capital firms and mega-buyout funds have been actively exploring opportunities in mid-stage companies. Growth funds raised a record $102 billion in 2021, up 53 percent from a year before and up 74 percent from the average of the preceding five years, according to Ernst & Young.
The fundraising success of 2021 has led to a large deployment of capital into growth equity. Since 2020, about 30 percent of growth capital has been invested in information technology companies, according to PitchBook. When investing in tech, growth capital funds often pour in more than $100 million in a single financing round, according to the Bain report. They even double their investments in later rounds to maximize their profits from initial public offerings.
“As a result, newly minted growth specialist funds, hedge funds, refocused VC firms, and other growth equity investors have become the preferred financial partner for many fast-growth companies,” the report said.
But the expansion of growth equity funds into the technology field hasn’t always been easy. Against a backdrop of high inflation and rising interest rates, the market capitalization of software-as-a-service companies has dropped more than 70 percent, shutting down the exit channel for most growth equity-backed companies, according to the report. In addition, many growth equity funds are being squeezed out by larger buyout funds, which have developed broader networks in the crowded fundraising environment.
Nevertheless, the Bain report expects that growth equity will continue to play an important role in tech. “Growth equity has fundamentally altered tech investing over the last decade, and there is a strong argument that the underlying changes that led to the creation of the asset class remain sound,” the report said. Growth equity funds have taken technological innovation — such as cloud computing, artificial intelligence, and virtual reality — to a new level, and growth capital is also likely to see opportunities in tech companies that have innovative business models, according to the report.
“Whether as direct competitors, complementary partners, or acquirers, companies are smart to operate on the principle that growth equity-backed business innovation is here to stay,” the report concluded.