Growth equity fundraising has experienced a gradual climb over the past decade, increasing 135 percent between 2014 and 2023, according to affiliate publication Private Equity International data. However, H1 2024’s fundraising total saw a decline on prior years, marking the lowest first-half total since 2017.
Venture Capital Journal reports that growth equity deals fell out of favor after valuations skyrocketed during the most recent tech boom. As fundraising conditions have become tougher, many LPs are consolidating their investments into fewer, larger funds, resulting in difficulties for growth-stage managers.
As part of its Global Private Markets Review 2024, McKinsey & Company examined the performance of private equity overall, buyouts, venture capital and growth equity. Growth equity funds had lower average returns than all other strategies, with a median IRR for 2011 to 2020-vintage funds of 9.8 percent. This compares with 15.7 percent for VC, 16.4 percent for PE and 18.1 percent for buyouts.
However, the return dispersion is lowest for growth equity, at 11.5 percentage points between the average top-quartile and average bottom-quartile funds. Venture capital funds had a dispersion of 16 percentage points, while buyouts had a 13.6 percentage point difference.
The largest fund focused solely on growth equity to ever close is Warburg Pincus’s Global Growth 14, which closed above its $16 billion target in 2023. At $17.3 billion, the fund is roughly 40 percent smaller than the largest buyout fund to have closed so far (CVC Capital Partners’ Fund IX, which raised €26.8 billion last year).
Three of the 10 largest growth equity funds ever raised as of early September 2024 account for 34.5 percent of total capital raised. All are Warburg Pincus vehicles.
Growth equity fund sizes, which experienced a jump during the 2019-22 fundraising peak, largely held steady over the past decade. H1 2024’s average of $356 million is 28 percent smaller than the highest figures seen in 2021 and 2022, according to PEI data.
On average, growth equity has been the third most popular strategy for private equity fundraisers over the past decade, accounting for 16 percent of all capital raised and 13 percent of funds since 2014, according to PEI data.
However, with strategies such as secondaries seeing increased popularity, this trend could be about to see a shift. According to PEI‘s Q3 2024 Fundraising Report, secondaries funds accounted for 10 percent of all capital raised in the first three quarters of the year – a hair’s breadth behind growth equity’s 13 percent.
Growth investors that can show solid track records continue to see strong investor interest. Headline recently closed its fourth global growth fund on $865 million, more than double the amount it was aiming for, as Venture Capital Journal previously reported. Founding partner Mathias Schilling tells VCJ that Headline was able to show more than $6 billion of total exit value for its portfolio companies in 2023, adding that, “I believe this drove the interest from LPs to both grow with us and start anew.”
