Diversification of portfolios is an important strategy for any private equity investor and with the range of fund types on offer, LPs are somewhat spoilt for choice when contemplating commitments. Buyout and venture capital funds are typically the most sought after fund types by private equity investors (52% of LPs on Preqin’s Investor Intelligence database have an appetite for buyout funds and 59% have a preference for venture capital funds), statistics also shows that growth funds remain an attractive investment prospect for LPs. Preqin's Investor Intelligence service currently tracks 5,346 investors in private equity funds, with a significant two-fifths (40%) having either previously invested in a growth fund or stated a preference for such vehicles.
Growth deals have a number of draws, offering benefits where the apparently more popular buyout and venture capital commitments fall short. For instance, growth equity investors allow owners to maintain an active role in their companies – an opportunity that is not necessarily available to buyout investors. Furthermore, in contrast to venture capital commitments, there is no early stage concept risk for growth deals, as they are traditionally made at a point of time when strong financial growth is proven in the business.
Growth funds are a particularly common investment choice for North America-based LPs, which account for 52% of LPs with a preference for this fund type. Europe-based investors account for 26% and Asia 13%. Of these LPs with an appetite for growth funds, the largest proportion (21%) is made up of public and private pension funds, and foundations follow, accounting for 11% of investors. Endowments represent 10% of investors interested in this fund type, while 8% of investors are insurance companies and 5% are banks. This indicates that the appeal of growth funds is widespread, both in terms of geography and investor type.
An example of a recent LP investment into a growth fund is that of Illinois State Board of Investment, which committed $20mn to Valor Equity Partners Fund III. The fund recently held a second close on $250mn and will focus on making expansion, growth and buyout investments in lower mid-market businesses across a range of sectors. Another instance is that of CDC Enterprises, which committed to Cathay Midcap Growth Fund III. The dual-focused fund held a first close on $460mn, targeting mid-cap companies based in France and China. Finally, District of Columbia Retirement Board has committed $25mn to Spectrum Equity Investors VII, which held a final close on $1bn this month. The size of this vehicle further evidences the strong appetite that exists for growth funds.
In Preqin’s recent H2 2014 Investor Outlook survey, it was found that out of all the private equity fund types, 7% of LPs believe that growth funds are presenting the best investment opportunities, and that during 2014, 12% would be looking to invest in growth funds. While this is not the leading fund preference of the LPs surveyed, it is clear that growth funds are still a stable choice for investors, and that the appetite for growth funds will continue to be significant within the private equity industry.