Growth investments: GPs lend a hand

Figures from unquote" Research show that growth capital deals now account for one in three deals completed in 2010 so far, which is markedly up from less than a quarter in 2007. As the chart below shows, 24.5% of all UK deals were expansion investments, while in 2009 this hit 31.5% and has grown to 36% this year. Furthermore, the use of expansion finance has rebounded impressively in the UK, in contrast to other deal types, which have yet to climb back to pre-2009 levels.

But what is driving these high levels of activity in the growth capital space, while venture and buyout numbers are depressed? There are a number of reasons for continuing problems in both the buyout and venture space. For buyouts, the financial crisis has resulted in higher leverage costs and increasingly cautious banks. As a result, only the most financially sound companies are able to obtain leverage on reasonable terms, curbing buyout activity. Meanwhile, venture has suffered difficult fundraising conditions during the recession as investors became more cautious, which has impacted the market.

Demand for growth capital may be partly driven by necessity. There have been widespread reports of small and medium-sized enterprises (SMEs) struggling to obtain finance from their banks. Unable to raise debt, many may now be considering giving up a stake in their business to attract finance from a growth investor.

For private equity houses too, there is still a desire to deploy capital on behalf of investors. While it may be difficult to arrange buyouts on reasonable terms, growth capital can be more flexible. Direct negotiations with a company over its finance needs can produce a more amicable result for both sides, without needing to rely on a third-party lender.

This has already resulted in some players in the venture space moving up to fund SMEs, while more buyout players consider expansion investment in times when leverage conditions remain difficult. However, it is important for the investment eco-system to have support from early-stage, right through to buyout-sized companies. While this may be a beneficial investment strategy in these tough conditions, a return to a more balanced market will be needed to ensure long-term stability.

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• Topics
• UK / Ireland
• Southern Europe
• Benelux
• DACH
• France
• Nordics
• Expansion