A higher-governance form of growth capital investing is gaining popularity as young companies are forced to navigate an intensely volatile world, says head of Permira growth opportunities Stefan Dziarski
The definition of growth capital can be somewhat nebulous. What do you see as the key components of a growth capital deal?
There is no standard definition – everyone has a slightly different take on what makes a growth capital transaction. But for us, there are a couple of essential ingredients: we look for companies that have a proven viability of business model and an attractive growth agenda in terms of product expansion, geographical expansion or other means of significant scaling based on the initial proof of concept.
We target businesses with more than $50 million in revenues that are exhibiting at least 15 percent annual growth – more, in most circumstances. We don’t need to see profitability, but we do need to see a business model and unit economics that suggest that it will be possible to reach profitability within a couple of years. Companies that fit this profile are typically young and small; they are scaling fast and are therefore likely to be experiencing some growing pains. Finally, therefore – and this is particularly important in today’s volatile world – these are businesses that are looking for a shareholder that can support them in the challenges and opportunities that they face.
We don’t run companies ourselves, but through our years of experience as investors, we do benefit from pattern recognition when it comes to helping the management teams solve the problems that young businesses so often face.
How are LPs thinking about growth capital with respect to manager selection and their wider allocation strategies?
I would say LPs view the growth capital segment as attractive in general, but they also acknowledge that growth capital can look very different depending on the manager involved. They are therefore looking closely at GPs’ portfolios to understand their approach, as well as looking at the capabilities that the manager has in order to deliver on that strategy.
The feedback we are getting on the higher-control approach to growth investing, in particular, is positive because of the opportunity these young businesses offer to enable us to drive transformative change. These companies also offer significant exit optionality if the value creation plan is executed well.
That is not to say that LPs are not also interested in backing managers focused on participating in big minority, passive rounds – that remains a portion of their portfolio. But investors are increasingly recognising the value that a higher-control model can offer and are adjusting their allocation models accordingly.
Historically, a central tenet of growth capital investment has been the acquisition of a minority stake, with limitations in terms of how much control investors can exert. Do you still believe this to be the case?
I do believe there will always be a minority investment model. There will be a part of the market where investors focus exclusively on taking minority stakes and remaining relatively passive, and that can be an attractive approach. That said, the world is changing so rapidly today – with the AI revolution transforming many sectors, challenging macroeconomic conditions, geopolitical conflicts and the ongoing situation with tariffs – that young companies have a huge amount on their plate. In that context, I would say the pure minority model has its limitations.
With a traditional minority-stake approach to growth capital investing, you have a very fragmented shareholder base, and that is reflected in a fragmented board. Some shareholders will have been in the business for a long time and may therefore be less focused on investment and more on monetisation. If you have a management team that wants to drive growth, but a fundamental misalignment in the shareholder base and board set-up, that can be difficult to navigate. That is why we believe that minority investment isn’t always the best fit, particularly in these volatile times.
What does an enhanced-control growth investment look like?
We have a flexible mandate when it comes to our growth strategy. We may take a higher-governance minority investment approach, which typically means taking a significant equity investment, often in the region of 30 to 40 percent. We also pursue co-control deals. We have completed a series of transactions where we partner with founders, family owners or existing shareholders. Equally, for us, a growth investment can be a control investment, more akin to a mid-market buyout, but in a high-growth business.
There is a whole menu of options available to us, and we choose the most appropriate one for any given situation. We sometimes even take small minority positions, but rarely, and only in deal set-ups where we have a specific angle: for example, our sector teams may have a close relationship with the company. Generally, though, our focus is on higher-governance minority, co-control and control transactions.
What implications does an enhanced-control approach have for the investment skills and expertise required to make these deals a success?
If you have traditionally focused on taking minority positions as a more passive investor, driving value creation in a business and supporting the management team in a co-control or control investment would be extremely difficult. What makes this possible for us at Permira is our sector set-up: we have teams dedicated to technology, consumer, services and healthcare who are experts in the thematics of each space. That is hugely important – particularly, again, given the rapid pace of change in today’s world.
It is also vital to have extensive resources around value creation so you can support these companies on their growth journeys – whether that means go-to-market expertise, internationalisation or M&A, for example. If you don’t have those capabilities, or if you haven’t done this before, then I think this high governance minority or co-control model will be challenging. For those investors, a more passive approach where the management team is in the driving seat makes most sense.
Are the lines becoming blurred between the growth capital model and mid-market buyouts? Will that impact competitive dynamics?
It is true that the lines are being blurred to an extent, although there continue to be firms focused on minority investment. Others, like Permira, are more sector focused and can therefore be flexible on their governance model.
At the same time, we are actually seeing some players leaving the market. There were a number of new entrants during the growth capital boom of 2020 and 2021, including hedge funds and public investors looking to take minority stakes in private growth companies, that have since withdrawn from the space.
What we see today is firms redoubling their efforts on those areas where they believe they are differentiated. Managers are focused on sticking to the swim lane where they have most to add.
The growth capital space has faced significant challenges in relation to a dearth of exits over the past couple of years. Does putting greater control in the hands of the growth capital investor help with this situation?
Interestingly, given our flexible mandate on governance, the challenging exit environment has actually led to some very interesting investment opportunities. There are many companies that have been struggling with fragmented cap tables. Long-term shareholders have been looking for monetisation events but IPOs have, of course, been extremely rare for all but the largest businesses. These companies have also not typically been large or profitable enough for a standard leveraged buyout. We have therefore been able to come in and reset cap tables, taking a large minority or control position and restoring alignment with management in order for the to drive continued growth. In that sense, a difficult exit environment has actually played into our hands.
With regards to our own ability to exit, meanwhile, I would say the most significant factor will always be the quality of the business that you own. Enhanced governance does not determine business quality, but it does improve alignment and give you the time and ability to execute on M&A or other business initiatives that might not be possible for a minority investor. In other words, it gives you more tools in your tool kit as you prepare for exit.
A strong business is still a prerequisite, however. In today’s environment, a B company will be tough to monetise no matter what the governance model is, while an A company will always be sellable.
Taking all of these evolutions into account, how do you see the growth capital space performing in the years ahead?
This is a very interesting point in time, because there are so many management teams out there looking for a strong partner to help them navigate the next couple of years. For managers with deep sector expertise and value creation capabilities, this presents an exciting opportunity. With all the volatility that exists due to everything from AI to an uncertain macro environment, however, it is clearly vital to be highly selective.
