Upside Potential of Venture Capital with A Downside Cushion
While VC and traditional buyout investment strategies are well known to investors, Growth Equity has evolved and matured into one of the best performing private equity strategies over the last 15 years. In fact, Growth Equity performed the best over 10+ year horizon compared to VC and buyout PE, according to a Cambridge Associates study. Furthermore, Growth Equity portfolio companies grew revenue and EBITDA even during the global financial crisis (2007 – 2009). We have invited Arcis Capital Partners (“ArcisCap”), a NYC-based growth private equity investment firm, to share their insights on Growth Equity.
Growth Equity has outperformed VC and buyout strategies over the last decade
Upside potential of VC with attractive downside protections
Has performed well during the 2008 financial crisis and well-positioned for potential economic downturn
GROWTH EQUITY BETTER RISK ADJUSTED RETURN PROFILE
For the level of risk taken in investing in a specific company, historical data suggests that Growth Equity funds have earned superior returns.
Over the last decade, Growth Equity has outperformed VC and buyouts.
GROWTH EQUITY SWEET SPOT
Growth Equity has different characteristics from both venture capital and traditional buyout private equity, and consequently represents a niche opportunity in terms of low risk-high return profile sought by investors.
Growth Equity firms create value by accelerating revenue growth and delivering targeted operational improvements with a hands-on approach unlike more traditional buyout strategies where extensive leverage is deployed to drive majority of the upside.
The chart above highlights typical capital types and associated strategies used over the course of a company’s life cycle.
PORTFOLIO COMPANY CHARACTERISTICS
The table highlights some of the key characteristics of typical candidate companies for venture, growth and traditional buyout strategies.
PORTFOLIO COMPANY RISK PROFILE
The table below highlights some of the key differences in risk profiles of target companies.
PORTFOLIO COMPANY LIFE-CYCLE
An ideal candidate for ArcisCap is one that is experiencing substantial managerial, strategic or operational hurdles obstructing business development and has identifiable opportunities for margin expansion through improved operational efficiencies. The company should also require broader market access to scale growth and be able to thrive in the immense, complex and growing US-Asia cross-border ecosystem.
The chart helps visualize the full life cycle of a company and where the ArcisCap Growth Equity strategy fits.
VC TYPE EXPOSURE WITH LITTLE OR NO TECHNOLOGY RISK
The popular perception is that buyouts, which invest in established companies with stable cash flow, should theoretically have superior downside protection. The observed data shows that the gap between Growth Equity and buyouts, at least for US companies, is not vast.
WE ARE IN LATE-STAGES OF ECONOMIC GROWTH CYCLE
This is the right time to think about Growth Equity due to the length of the cycle and run up and valuation/style drift by all private equity strategies. OECD has cut growth forecasts recently again on trade tensions and rising uncertainty. Other Industry forecasts from different sources tell the same story of slowing macroeconomic growth.
THE OPPORTUNITY NOW – UPSIDE POTENTIAL WITH A DOWNSIDE CUSHION
According to Cambridge Associates, from 2008 through 2017 Growth Equity companies generated an average annual revenue growth rate that was 2x that of buyout companies and 3x that of public companies.
On the flipside, Growth Equity has a demonstrated history of performance in market downturns as seen in 2009 when PE Owned Growth Equity companies were still able to manage positive revenue growth.
Special Thanks to Our Contributor
Afzal M. Tarar
54 West 40th Street
New York, NY 10018
Arcis Capital Partners LLC (“ArcisCap”) is sponsoring Arcis Technology Growth Fund LLC that invests in US technology companies with proven business models that are poised to grow – companies that we believe can meaningfully benefit from our approach of “Growth Engineering” to produce transformative change and accelerated growth in both the U.S. and Asia.
ArcisCap team is deeply rooted in global growth and performance transformation – strategic, financial, operational and technological. The team consists of globally experienced operators and investors, advisors and strategists, bankers and deal makers, and entrepreneurs. The team has differentiated experience across healthcare, digital technologies and cleantech.
The objective of the ArcisCap approach is to position our companies for an expedited exit. ArcisCap does not commit to any investment without first developing a clear roadmap for growth and identifying targeted paths to exit.
ArcisCap has already secured several exclusive investment opportunities and curated numerous opportunities, many with asymmetric global growth potential.
The firm is headquartered in New York City with offices and partner presence in Atlanta, Cambridge, Orlando, Beijing, Shanghai and Hong Kong.