What is Growth capital?
Growth capital may also be known as expansion capital and growth equity.
It is a type of private equity investment, usually a minority investment, in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a significant acquisition without a change of control of the business.
Why do companies need it?
Companies that seek growth capital will often do so to finance a transformational event in their lifecycle. These companies are likely to be more mature than venture capital funded companies, able to generate revenue and profit but unable to generate sufficient cash to fund major expansions, acquisitions, or other investments. Because of this lack of scale, these companies generally can find few alternative conduits to secure capital for growth, so access to growth equity can be critical to pursue necessary facility expansion, sales and marketing initiatives, equipment purchases, and new product development.
Can it be used for other things?
Growth capital can also be used to effect a restructuring of a company’s balance sheet, particularly to reduce the amount of leverage (or debt) the company has on its balance sheet. Growth capital is often structured as preferred equity, although certain investors will use various hybrid securities that include a contractual return (i.e., interest payments) in addition to an ownership interest in the company. Often, companies that seek growth capital investments are not good candidates to borrow additional debt, either because of the stability of the company’s earnings or because of its existing debt levels.