The Private Advantage: Exploring the Benefits of Investing in Founder-Led, Growth Companies

As a long-term investor in private, growth-stage companies, we have experienced first-hand how compelling the opportunity to support high-quality founders can be. A founder’s journey capitalising on their business’ growth trajectory can be very rewarding financially and personally. In this paper, we share with you the key benefits of investing in this Private Equity asset class and our preferred structure/s for investing. But first, here is a quick recap of how we define growth equity and how it compares to venture capital and other more traditional forms of private equity investing.  

What is Growth Equity and How Does it Compare

Growth equity investing is an area of investment that falls between venture capital and private equity. Unlike traditional private equity, growth equity investments are typically made through a minority, non-controlling investment stake resulting in the founders of target investments typically retaining ownership and operational control.  

The diagram below illustrates the typical life cycle of a company and identifies the target area for ‘growth equity’ investment.

‍Key Benefits of Growth Equity Investing

There are many benefits of investing via a growth equity strategy, one of which is that it involves lower early-stage risk. Founders in growth stage companies have proven their ability to innovate and create a new product or service, craft it to create product-market fit, execute to deliver critical mass in their industry, and problem-solve in design, production or logistics to improve the customer journey. They have already displayed the resilience required to persevere through the challenging start-up and venture capital phase. By investing in companies that have already achieved some level of success, the risk associated with early-stage investing is materially reduced.

Growth equity investments are also more likely to have value protection in a downside scenario. By investing in companies that have already established themselves in their respective markets, some of the risk associated with investing in earlier-stage start-ups is mitigated, particularly in the event of a market downturn or any other negative external factors affecting the business.

As mentioned, growth equity investing is often characterised by a minority, Non-controlling investment stake often being taken in a business, with the founders ’retaining ownership and operational control. We see this as a key benefit as it results in a significant alignment of interests between the investor/s and founder. Indeed, by maintaining a minority interest, founders have more to gain and more to lose than we do as investors. They are highly incentivised to succeed, and, as equity partners, we are deeply aligned with them. We, as investors and strategic partners to the founders and management team, assist the management in executing a shared vision and strategy for growth – without an alignment of interest, this would inevitably prove to be difficult. As Charlie Munger often said, “Show me the incentive and I'll show you the outcome”.

‍Growth Equity in Practice: Case Studies

Before jumping into the growth stories of two of our portfolio companies, outlined in the diagram below is the revenue and growth profile of the 248 Emerging Companies Fund. The Fund, established in May 2019, represented a total of 14 investments, diversified across sector and industry. The chart below shows the aggregate revenue and growth profile of the nine investments still held in the fund as at 30 June 2024.

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Case Study 1 – Bellroy

Bellroy is a B Corp certified, Australian-based producer of ‘carry’ accessories. Their product line encompasses wallets, bags, backpacks, travel kits, laptop bags and accessories and is sold in over 150 countries.  

We invested in Bellroy in June 2019, partnering with a high-quality owner-management team, to fund growth through category and channel expansion in an attractive high margin e-commerce segment.

Case Study 2 – Portt

Portt is a Software as a Service (SaaS) platform for managing the procurement process with a customer base primarily comprised of large government agencies in Australia and New Zealand.  

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Preferred Product Structure and Approach

Our portfolios are concentrated in nature, each targeting between 10 and 15 underlying investments. We take only minority, non-controlling positions to ensure a total alignment of interest with the founders and management teams we partner with.  We seek to invest on negotiated, preferred terms, enabling downside protection to investment returns and we minimise liquidity risk by maintaining a clear line of sight on the liquidity event that will enable us to realise our investment thesis.

We take an active approach to investing, utilising our operational expertise to work closely with founders and management teams in realising their growth strategy. Our approach enables a deeper and more intimate relationship with the founders we are partnering with and a greater understanding of the businesses we are investing in.

We have relatively low exposure to conventional pre-IPO deals, having made the decision early not to rely solely on an IPO for liquidity or IPO discounts for returns.

We target high-quality, growing businesses with real customers generating material revenue, and avoiding excessive technology risk. We typically look at the metrics of revenue and revenue growth as key investment indicators. Typically, investee companies will be producing revenue in excess of $20 million per year with revenue growth of +20% year-on-year to screen positively for investment.

We always invest with a line of sight to an ultimate liquidity event, but want our companies to have both a private or a public sale available to them. Historically, we have found the best outcome for growth-stage companies is through a trade sale, where operational synergies and efficiencies exist and where there is potential to align interests and ambitions for future growth.

We seek downside protection wherever possible, seeking Board representation where appropriate and there is little to no gearing across the entire portfolio.

Our closed-end fund structure provides investors with an opportunity to reap the benefits of investment without impact from the use of liquidity-producing instruments such as those that are often used for the management of open-ended funds.

Conclusion

Growth equity investing is an exciting area of investment that offers many benefits to investors.

We believe in providing investors with funds that offer the opportunity to invest in high quality, Australian companies that are building on their proven strategy and poised to deliver enhanced growth with an acceptable level of downside protection.  

We believe the best way to invest in growth-stage companies is through a fund structure that is not distracted by a requirement for daily liquidity thereby optimising returns to investors and reflecting the nature of the investment being made.

We are excited about the growth potential of the companies in our portfolio and look forward to supporting them on their growth journeys.

About Us

248 Growth Partners was established to invest in growing Australian companies. We partner with high-quality founders by making high-conviction investments to help them achieve their growth objectives and maximise value through a material liquidity event. 248 Growth Partners manages capital across two funds, the 248 Emerging Companies Fund (2019) and the 248 Emerging Companies Fund II (2021).

To register your interest in investing, please contact us.

248 Growth Partners is thetrading name of CVC ECF Managers Pty Limited (ACN 644 213 221, AustralianFinancial Services Licence 541681). One Fund Services Ltd (OFSL) (ACN 615 523003)(AFSL 493421) is the trustee of the 248 Emerging Companies Fund I and 248Emerging Companies Fund II. The information contained in this document was notprepared by OFSL but was prepared by 248 Growth Partners, the trading name ofCVC ECF Managers Pty Limited (ACN 644 213 221, Australian Financial ServicesLicense 541681).

While OFSL has no reason tobelieve that the information is inaccurate, the truth or accuracy of theinformation in this document cannot be warranted or guaranteed. Anyone readingthis presentation must obtain and rely upon their own independent advice andinquiries. Investors should consider the Information Memorandum (IM) relevantto the Funds before making any decision to acquire, continue to hold or disposeof units in the Funds. You should also consult a licensed financial adviserbefore making an investment decision in relation to the Funds.

This document may containgeneral advice. Any general advice provided has been prepared without takinginto account your objectives, financial situation or needs. Before acting onthe advice, you should consider the appropriateness of the advice with regardto your objectives, financial situation and needs.

Past performance is not areliable indicator of future performance. This announcement may containstatements, opinions, projections, forecasts and other material(forward-looking statements), based on various assumptions. Those assumptionsmay or may not prove to be correct. The Investment Manager and its advisers(including all of the past performance is not a reliable indicator of futureperformance. This announcement may contain statements, opinions, projections,forecasts and other material (forward-looking statements), based on variousassumptions.

Those assumptions may or maynot prove to be correct. The Investment Manager and its advisers (including allof their respective directors, consultants and/or employees, related bodiescorporate and the directors, shareholders, managers, employees or agents of anyof them) (Parties) do not make any representation as to the accuracy orlikelihood of fulfilment of the forward-looking statements or any of theassumptions upon which they are based.

Actual results, performance orachievements may vary materially from any projections and forward-lookingstatements and the assumptions on which those statements are based. Readers arecautioned not to place undue reliance on forward looking statements and theParties assume no obligation to update that information.

CleanSpace refers toCleanSpace Holdings Ltd; Deep Blue refers to Deep Blue Company Pty Ltd; Bellroyrefers to Bellroy Pty Ltd; Moneytech refers to Moneytech Group Ltd; Auscred Ltdis trading as Lendi; Access Innovation Holdings Ltd is trading as Ai Media; N1Telecommunications Pty Ltd is trading as NodeOne; Single Cell Mobile ConsultingPty Ltd is trading as Portt; DesignCrowd refers to DesignCrowd Pty Ltd; Orbxrefers to Orbx Investments Ltd; Studiosity refers to Studiosity Pty Ltd;Airtasker refers to Airtasker Limited; and Mason Stevens refers to MasonStevens Group Pty Ltd.

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