Growth equity is a type of private equity investment, generally minority investments in companies looking for capital to expand, enter new markets or acquire companies whilst retaining control of the business.
Companies looking for growth equity generate revenue, are profitable or close to profitability within a short period but unable to generate sufficient cash to finance big expansion plans, marketing initiatives, equipment purchases etc. Certain companies do not require equity but transformation help to address new markets, for example helping European companies to enter new markets such as the US and/or Asia.
The Preqin global growth equity market review for 2017 reported:
According to Preqin, growth funds enjoyed current investor liquidity with the majority of vehicles closed, exceeding their initial fundraising target in 2017. North America (46%) leads in the number of funds raised, followed by Asia (37%) and then Europe (14%). The majority of funds raised have a diversified industry focus, however, the technology sector is the largest proportion of sector specific growth funds ($26bn). Also, within the diversified funds, technology represents close to 64% of their industry focus.
There is a significant funding gap in the market of specialist growth capital to address the equity needs of European B2B technology scale-ups. The US invests seven times more capital into growth stage of technology companies compared to Europe . This provides massive financing opportunities for Growth Tech funds in Europe.
According to Atlantic Bridge, a top tier technology growth capital firm managed by serial entrepreneurs, there is a multi-trillion-dollar investment opportunity in European “Deep Technology” that powers new devices that can see, hear, speak, sense and think, and the datacenter technologies that support and process these massive amounts of real-time datasets, otherwise known as AI, semiconductors, autonomous systems, industry 4.0, big data, cybersecurity and robotics.
The table below highlights the growth sectors in Deep Technology:
Europe is ideally positioned to lead alongside the US and China in Deep Technology for three reasons: (1) distinguished and recognized research institutions (largest share of renowned AI research institutions worldwide), (2) large domestic talent pool (twice more PhD graduates in science, technology, engineering and mathematics subjects vs the US (source: Times Higher Education); and (3) strong technology ecosystem. In addition, European industrials, banks, automotive and pharmaceutical companies are very much early adopters of new technology and leverage off local companies.
This funding gap creates an opportunity for specialist European “Growth Technology” funds to finance European innovation at highly appealing valuations. However, the fund landscape in Europe seems to be as follows: 75% are domestic players, 5% operate in Europe and the US and only 1% operate across Europe and China. Technology is a global market and so should require players with global presence in the key geographies to facilitate access to global customers and partners: Europe, US and Asia.
Today, the US is the key market for M&A activity in the technology sector and has to date proven to be fertile ground for the acquisition of European technology companies. Asia is following close and likely to overtake in the next 10 years, the M&A space with China and Japan playing leading roles. The $100 billion Vision Fund established recently by the Japanese technology player, SoftBank is a good example. SoftBank’s plan is to “keep growing for 300 years” by investing in category winners and accelerating investments in telecom and AI.
Thus, for a Limited Partner “Investor in the Fund”, Avondale (AAA) believes that it is important to choose a European Growth Technology fund that (1) has the ability to understand the opportunities in the shifts/disruption waves in technology (2) can leverage off direct operational technology expertise (3) benefits from a proprietary sourcing of deals and finally (4) can bring cross-border expansion opportunities both in terms of knowing the customers in the various markets and the acquirers via a strong and efficient Silicon Valley and Chinese presence. US customers or their competitors are currently the ideal acquirers for these European beauties so knowing them well helps Funds fine tune their shopping list/ corporate intelligence for future roadmaps of the most attractive companies in Europe. This combination of factors should contribute to top quartile performance for the Fund and Limited Partners.
Avondale Alternative Advisors (AAA) advises private equity firms on investor relations and fund raising. In the interest of transparency, AAA is an advisor to European growth technology firms including Atlantic Bridg
