The other private equity: despite the credit crunch, growth equity spurs innovation, promotes economic growth, and builds strong public companies.

• Author: Ford, William E.
• Position: BIG DEAL

THE RECORD PACE and volume of "going private" transactions over the past couple of years made private equity a household phrase--one most associated with leveraged buyouts (LBOs) of publicly traded companies. While the credit crunch has constricted the financing that made so many large transactions possible, it has not diminished the integral role private equity plays in supporting the growth, and thus the health, of the global economy. Growth fuels innovation, creates jobs, and contributes to economic development, and there is an entire segment of the private capital market dedicated to just this purpose. It's called growth equity.

On the private equity spectrum, growth equity occupies an important place between venture capital and LBOs. Growth equity is distinct in its focus on working with promising companies to achieve business scale and market leadership. It provides a vital bridge of capital and expertise for privately owned firms transitioning from successful start-up to a publicly traded enterprise.

Given the significant changes in the capital markets over the past several years, growth equity, dedicated to building businesses and fueling growth, has become more important than ever in supporting the success of growth companies and the public benefits they provide.

Equity is the lifeblood of growth companies. Growth companies often need outside equity investment to fund working capital needs, add skilled employees, build scale, extend global reach, and complete strategic acquisitions. Yet without significant hard assets or track records of profitable performance, most cannot rely on debt to fulfill their financing needs even in the most favorable financing environment; in a tight credit environment, of course, bank financing is even less available and more costly to obtain. Compounding matters, Sarbanes-Oxley and the overhaul of investment research have made it more difficult for younger growth companies to tap the public markets for equity capital. Growth equity has become more important than ever in supporting the success of growth companies and the contributions of such companies to the economy.

But emerging growth companies need more than capital. The most promising growth companies seek a partner that can add value by providing strategic and financial expertise. The best growth equity investors have deep industry knowledge and operational experience; their success is tied to the quality and soundness of a company's growth...