Growth Equity

Why invest in Growth Equity

• Scalable business models
• Lower risk than venture
• Higher growth potential than buyouts
• Minority ownership
• Founder-led continuity
• Strategic and operational support
• Exposure to high-growth sectors
• Attractive risk-adjusted returns
• Portfolio diversification
• Proven revenues and market traction

What are the main risks of Growth Equity

• Minority position limits control
• Dependence on founder execution
• Illiquidity of private investments
• Valuation risk at entry
• Slower path to exit vs. venture
• Market volatility impacts scaling
• Dilution risk in follow-on rounds
• Competitive pressures in growth sectors
• Execution risk on expansion plans
• Limited downside protection compared to buyouts

What characterizes Growth Equity?

• Industry/Sector: Both generalist and sector-focused strategies are common. Popular sectors include technology, healthcare, sustainability, consumer goods, and B2B services. Growth Equity typically targets companies at a scale-up stage—established but not yet mature—where capital and strategic support can unlock significant expansion. Sector selection often reflects broader megatrends such as digitalization, demographic shifts, or the energy transition.
• Integration of ESG: ESG is increasingly viewed as a lever for long-term value creation and downside protection. While not all Growth Equity strategies are impact-driven, many incorporate ESG screening, governance enhancements, and sustainability-linked initiatives. Engagement plays a key role, with investors often guiding companies toward stronger ESG alignment during the growth journey.
• Instruments: Primarily equity - most often minority stakes. Structured equity may be used to align incentives and manage risk, particularly in founder-led settings.
• Target Company Size: Small to mid-sized companies with €10–100m in annual revenue and clear growth potential. Businesses are typically profitable or approaching profitability, with proven product-market fit and potential for geographic, digital, or operational scale.
• Return Profile: Value creation is driven by revenue and earnings growth, often supported by operational improvements, new market entry, and digital transformation. While leverage is limited, multiple expansion may also play a role - especially when institutional backing professionalizes and repositions the business for its next phase.
• Geography: Global, regional, or country-specific strategies. Europe and North America are core markets, though select emerging markets are increasingly relevant. Geography will often influence both growth trajectory and the ESG maturity of target companies, requiring tailored approaches to engagement and scaling.

Question 1. What is driving the evolution of the opportunity set in growth equity? 

At Baillie Gifford, we believe that structural tailwinds are making the opportunity for Growth Equity investors more compelling than ever. Key drivers include.

Independent Ambition: The most ambitious companies prioritise independence, aiming to become future market leaders rather than acquisition targets. Growth-stage private companies today have different needs and therefore require a different set of shareholders for this part of their growth journey. By expanding the private investment opportunity set to include non-control investments, investors positively select for high-quality companies.

Leaner and Stronger Companies: In 2022, private growth companies were shut off from capital markets as funding rounds and exits virtually stopped. This led to 'creative destruction', resulting in leaner and stronger companies. As a result, we’ve been seeing better companies at better valuations

Profitability focus: Many growth-stage companies are raising the last round required before reaching profitability. This is a dramatic shift from 2020-2022 when companies had no clear profitability targets. Once companies reach profitability, their risk of failure falls substantially while the door to IPO begins to open. The best companies have learned that revenue growth and profitability can coexist. 

Question 2. How does the trend of staying private longer transform the growth equity landscape?

Why private for longer? Because private companies can carefully select their investors, allowing management to make bolder, longer-term investments than public companies.

Capital markets have been forced to adjust. As companies remain private 10-12 years after launch, their original venture owners no longer have sufficient fund life remaining to hold. Private growth shareholders not only have the time horizon to support companies for the next 10 years of growth but also have experience in owning companies as they scale.

Private growth shareholders can also help upgrade governance structures for the next decade of growth and help navigate the shareholder transition through an IPO and beyond. This is the new form of value-add, aligned to the stage of private growth companies.

The term unicorn was coined in 2013 because $1bn private companies used to be rare. Only 39 existed globally then. Today, that number sits closer to 1,500, with a combined market value of more than $5tn. There’s now a vast and expanding market of exceptional growth-stage private companies. Growth equity is an asset class that’s become difficult to ignore.

Question 3. How is the changing global geopolitical order reshaping risks and opportunities in growth equity?

At Baillie Gifford, our focus is bottom-up analysis of companies – scrutinising growth characteristics rather than themes, narratives or macro dynamics. Despite the uncertainty in the world, we feel many of our portfolio companies are well placed to thrive in a world of deteriorating trade relations and geopolitical uncertainty. This is partly because of the dynamic management teams at the helm of our portfolio companies, finding ways to adapt during tough times, which is a key part of our underwriting analysis. Several of our holdings are also removers of friction in an uncertain world – be that global payments, communications infrastructure, supply chain management in emerging markets or defence innovators.

Whilst uncomfortable, geopolitical uncertainty can create short-term mispricing as investors grapple with the implications of current policies. We’ve seen examples of high-quality companies trading at steep discounts and will continue to be on the lookout for other such opportunities. In our view, the key to identifying these companies is a rigorous and selective process, coupled with a long-term mindset that looks past today’s uncertainty.