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Growth equity: finding the right 'Tweener' investor30/04/2008. Source: Frontier Capital. Richard Maclean 
 In 2007, US private equity firms raised a record $302bn in 415 funds. While the vast majority of this capital is earmarked for leveraged buy-outs and early stage venture, many companies fit the criteria for neither, says Richard Maclean of Frontier Capital. These 'Tweeners' are established and growing businesses that lack the intellectual property to attract venture investors or the EBITDA to be a leveraged buy-out.
 Growth equity investors, a lesser known sector of private equity, are addressing the needs of Tweeners; however, choosing the right growth partner is not always easy.
Growth equity investors are typically seeking established companies with at least $5 million of revenue. They want to invest in well-run businesses where the combination of additional capital and operational guidance can help accelerate value creation. They typically purchase a minority stake allowing existing shareholders to retain control. Many growth equity investors will allow founding shareholders to achieve liquidity and diversify their financial holdings
The benefits of growth equity for Tweeners can be numerous. These can include an improved ability to attract top talent, accelerate investments in sales and marketing, ramp up product development or make an acquisition. Additionally, most growth equity investors facilitate the establishment of a board of directors which can provide valuable perspective and experience. These benefits can dramatically improve a Tweener's market position and significantly increase the value and accelerate the timing of an exit.
Once a Tweener has decided to raise growth equity, existing shareholders and management must be extremely diligent about finding the right partner. The right partner can help unlock value and take the company to the next level. The wrong partner could hamstring the company for years to come. Below are a few questions Tweeners should consider before moving forward with a growth equity investor.
- "Can I work with these guys?"
Character and reputation of the investor is critical. Conduct extensive due diligence on their track record. Talk to prior CEOs who have partnered with them. Ask around the professional community. Make sure they are well-respected. Chemistry is also important because building great companies is never easy.
- "Do they get it?"
Make certain the investor understands the business and the challenges the company faces. Ideally they have made investments in similar companies. Tweeners need partners to have expertise and best practices to share that will mitigate risks and help prevent mistakes.
- "What do they bring besides money?"
A good growth equity investor brings more than just money to the table. They offer their partner companies strategic guidance, access to a broader network of contacts and valuable assistance with future financings, acquisitions and the ultimate exit. Again, check references to determine their value add in previous investments.
- "Will they try and run my business?"
It is critical to find an investor that is focused on the big picture. Most growth equity investors are active board level investors. Beware of those prone to micro-managing or meddling in day to day operations.
- "Are we on the same page?"
Initial expectations must be aligned as it relates to such issues as pace of growth, target profitability and strategic direction. It is also important that the Tweener and growth equity investor share the same views in terms of the ultimate size, value and timing of a potential exit for the business.
Raising capital and selling a minority stake can be one of the biggest decisions ever made in a company's life-cycle. While valuation is certainly important, choosing the right partner is even more critical. Make the correct decision and a Tweener company can be on its way to a very successful next chapter.
Richard Maclean is a Founder and Managing Partner of Frontier Capital, a private equity firm providing growth equity to business service companies. Frontier's invests in traditional and tech-enabled services companies that have a proven solution in the marketplace and need capital to accelerate growth, make acquisitions, or generate shareholder liquidity. The firm is based in Charlotte, N.C. and provides $5-$10 million per investment in companies throughout the Southeast and Mid-Atlantic regions. For more information on Frontier Capital, visit www.frontiercapital.com.
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