PE and venture houses converging on growth

At a seminar in London this morning, Emma Danks (pictured), a partner in Taylor Wessing's private equity practice, said buyout houses and venture capital firms are converging in the growth space.

"As venture houses change their risk profile to look at mature businesses, they are increasingly looking at companies in need of growth capital, while difficult leverage markets are causing buyout specialists to look at businesses which aren't suitable for leveraging but could offer high returns. In the future we may see buyout and venture investors co-investing in the same deal," she says.

Others agree, saying the venture space can be a particularly hard sell, having generally delivered poor returns over the past decade and offering a risk profile that is unattractive to many institutional investors. Laurence Garrett, partner at Highland Capital Partners, suggests many early-stage venture investors were essentially "taking a punt" and predicting which businesses would succeed or fail at this stage was very difficult.

By moving into the growth capital segment, venture houses can continue to leverage their expertise in helping businesses that are going through a transformative stage, but with an existing working business model and some cashflow helping to reduce the risk involved.

For buyout houses, there are different motivations for seeking investments in companies at an earlier stage of development. Companies in need of growth capital are not usually able to raise significant amounts of financing as, while they are generally profitable, cash flow is low and profits usually need to be driven back into the business to fuel further growth, rather than paying interest on a loan. By contrast, buyouts usually focus on operational improvements and financial engineering to generate returns.

However, in an environment where leverage is hard to come by and financial engineering cannot be relied upon for returns, growth capital deals can offer similar returns but without the need to resort to leverage, making them attractive to buyout houses.

Jacques Callahhan, deputy head of European investment banking at Canaccord Genuity Hawkpoint, said: "Private equity investors are also seeing less dealflow in their usual market segments, which is forcing many to look at earlier stages for investment targets. At the same time, many growth capital companies that would normally seek a bank loan are finding the banks closed for business, and are also seeking out private equity houses for the investment needed to help them grow."

In difficult market conditions, investors are increasingly having to innovate and operate outside their comfort zones to access deals. The convergence on the growth space is perhaps unsurprising given market conditions, but it remains to be seen whether this area has enough investment opportunities to keep everyone happy.

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