Growth Equity

Mechanism

Growth equity is defined by a company's position and an investor's rights, not by statute. Neither the text of 17 CFR 275.203(l)-1 nor the Form PF glossary contains an entry for growth equity, so the term is a market convention.

Cambridge Associates describes the typical growth equity company as founder-owned, with no prior institutional investment, a proven business model, organic revenue growth usually above 10 percent and often above 20 percent, and EBITDA that is positive or expected to turn positive within 12 to 18 months. The National Venture Capital Association's Growth Equity Group, as quoted in a 2019 Business Law Today article, lists traits that include a non-controlling minority interest, investments often unlevered or lightly levered, and capital directed to expansion or shareholder liquidity.

Cambridge Associates adds that these securities often carry negative control provisions, such as approval of the annual business plan, acquisitions or divestitures, and new debt or equity issuance, together with the ability to initiate a liquidity event after roughly three to five years.

The SEC draws the practical line for fund classification. Under 17 CFR 275.203(l)-1(a), a venture capital fund must meet five conditions. Among them, it must represent to investors that it pursues a venture capital strategy, hold no more than 20 percent of its aggregate capital contributions and uncalled committed capital in assets that are not qualifying investments (short-term holdings aside), and incur no borrowing or other leverage above 15 percent of that same base, with any such leverage limited to a non-renewable term of no more than 120 calendar days. It also may not offer redemption rights except in extraordinary circumstances and may not be registered under the Investment Company Act.

Under paragraph (c)(3)(i), a qualifying investment is an equity security acquired directly from the portfolio company, so a share bought from an existing holder does not qualify.

Form PF defines a private equity fund as any private fund that is not a hedge fund, liquidity fund, real estate fund, securitized asset fund or venture capital fund and that does not provide investors with redemption rights in the ordinary course. A growth equity fund outside the venture capital definition, and outside the other listed categories, therefore reports as a private equity fund.

Worked Example

Consider a hypothetical $100 million fund that buys newly issued shares in a company valued at $40 million before the investment. The fund contributes $10 million, so the post-money value is $40 million plus $10 million, or $50 million, and the fund owns $10 million divided by $50 million, or 20 percent. The $10 million equals 10 percent of the fund ($10 million divided by $100 million). Because the company issues the shares, the purchase can be a qualifying investment under 17 CFR 275.203(l)-1(c)(3)(i).

A hypothetical buyout of the same company at a $50 million equity value acquires 100 percent of the shares. If $25 million is financed with debt, the buyer contributes $25 million of equity. The figures are hypothetical and illustrate structure only.

Cambridge Associates measured aggregate capital loss ratios on 1992 to 2008 deals, as of March 31, 2012, at 13 percent for growth equity (260 deals), 35 percent for venture capital (22,507 deals) and 15 percent for leveraged buyouts (5,188 deals). The sample is historical, so it describes the shape of the risk, not current outcomes. The Cambridge Associates page, last updated December 15, 2025, still presents the data as of March 31, 2012.

What It Means for a Limited Partner

An allocator should read a manager's claim to growth equity as a set of testable facts rather than a label. Because classification under 17 CFR 275.203(l)-1 begins with what a fund represents to investors, the useful request is the portfolio itself: the share of each investment issued by the company rather than bought from existing holders, the ownership percentage, the control rights, the leverage, and the route to a liquidity event.

Cambridge Associates found that, on 1992 to 2008 deals, venture capital deals returning more than five times cost accounted for 6 percent of invested capital and nearly 60 percent of total value, while similarly high-performing growth equity deals accounted for 9 percent of invested dollars and 37 percent of total value.

Under 15 U.S.C. 80b-3(l), only an adviser acting solely for venture capital funds as the SEC defines them is exempt from registration on that basis. A growth equity adviser outside the definition instead registers, or relies on the separate private fund adviser exemption in 15 U.S.C. 80b-3(m) while its private fund assets under management in the United States remain below $150 million, in which case it files as an exempt reporting adviser.

In Life Sciences and Healthcare

The profile of a proven model, growing revenue and positive EBITDA arrives later in healthcare than in software. No person may introduce a new drug into interstate commerce unless an approved application is effective, 21 U.S.C. 355(a), and no biological product may be introduced without a license in effect, 42 U.S.C. 262(a)(1). FDA does not permit a sponsor to market a device that requires a 510(k) before issuing a substantial equivalence order. Commercial-stage diagnostics, device and digital health companies therefore fit the growth equity profile more readily than clinical-stage therapeutics, which cannot generate product revenue before approval.

Governing Authority and Sources

• SEC, 17 CFR 275.203(l)-1, Venture capital fund defined: ecfr.gov.
• Investment Advisers Act section 203(l) and (m), 15 U.S.C. 80b-3(l) and (m): law.cornell.edu.
• SEC, Form PF Glossary of Terms, Private equity fund: sec.gov.
• Cambridge Associates, Growth Equity (2013; data as of March 31, 2012): cambridgeassociates.com.
• American Bar Association, Business Law Today (April 12, 2019), quoting the NVCA Growth Equity Group: businesslawtoday.org.
• Business Development Bank of Canada, glossary, Leveraged buyout: bdc.ca.
• Federal Food, Drug, and Cosmetic Act section 505(a), 21 U.S.C. 355(a): law.cornell.edu.
• Public Health Service Act section 351(a), 42 U.S.C. 262(a)(1): law.cornell.edu.
• SEC, 17 CFR 275.204-4, Reporting by exempt reporting advisers: ecfr.gov.
• FDA, Premarket Notification 510(k): fda.gov.

Frequently Asked Questions

What is growth equity?

Growth equity is capital provided to established, fast-growing companies, usually as a minority investment with little or no debt. Cambridge Associates describes the typical company as having a proven business model, organic revenue growth usually above 10 percent, and EBITDA that is positive or expected to be within 12 to 18 months.

What is the difference between growth equity and venture capital?

Growth equity backs companies with proven models and positive or near-positive earnings, while venture capital backs earlier companies. Cambridge Associates measured aggregate capital loss ratios of 13 percent for growth equity and 35 percent for venture on 1992 to 2008 deals, as of March 31, 2012.

What is the difference between growth equity and private equity?

Growth equity is a branch of private equity that differs from a buyout in control and leverage. It usually takes a minority stake with little or no debt, while a buyout acquires control, and Cambridge Associates states that debt is expected to be a material contributor to buyout returns. On Form PF, a fund outside the venture capital definition is a private equity fund.

Related Reference

This entry belongs to the pillar Growth Equity Thesis. Related entries: The Mid-Market in Private Equity, The Operating Partner, and The Illiquidity Premium.