Do Growth Equity Funds Produce Good Returns?

As a sub segment of the private equity space, growth equity investments focus on relatively mature firms that are looking to expand, enter new markets, restructure operations, invest in R&D, new product development, and act upon other growth initiatives without losing control of their businesses. Private equity firms therefore typically take minority stakes in these growth companies through their investment.

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This later-stage fundraising often comes from sources such as private equity, late-stage venture capital, hedge funds and family offices. Like all private equity investments, growth equity is intended to maximize return on investment.

Cambridge Associates 2017 Q1 report shows buyout and growth equity funds returning an average of 4.3% in the first quarter of 2017, 14% over the 12-month period, 12.5% over the five-year period and 13.4% over the past quarter century. By comparison, the S&P 500 Index gained about 6.1% in Q1, 17.2% over the past year, 13.3% over the past half-decade and 9.5% in the last 25 years. Bloomberg Barclays Government/Credit Bond Index ticked up about 1% in Q1, 0.5% over the past year, 2.5% in five years and 5.8% over the last twenty-five.

Using the Modified Public Market Equivalent (mPME), a benchmarking methodology used by institutional investment advisor to assess whether returns from private investments outperformed public investments, Cambridge indicates that its US Buyout & Growth Equity Index has secured a horizon pooled return of about 10.9% compared to its CA mPME equivalent over the past year, 9.8% over five years, and 12.6% over the last twenty-five.

Viewed against the US private equity industry at large, represented by the Cambridge Associates LLC US Private Equity Index, buyout and growth equity outperformed in Q1, as the US Private Equity Index returned an average 3.9%. Over the past year, US private equity generated more for investors than buyout and growth equity, with a 17.4% return, while its five-year and twenty-five-year returns were nearly the same.