Later Stage Growth Capital - what you need to know

In unserer neuen & informativen Wissensreihe Beyond Capital veröffentlichen die Board Member von invest.austria regelmäßig Beiträge zum Startup- und Investor:innen-Ökosystem. Diesen Monat teilt Niklas Pichler, Managing Partner von BlackPeak Capital, seine Expertise mit uns.

Later stage growth capital plays a pivotal role in the private equity ecosystem and offers an attractive set of opportunities but also challenges for both companies and investors. As businesses mature, the need for strategic funding to fuel expansion becomes paramount. In this blog, we delve into the intricacies of later stage growth capital, shedding light on situations in which growth capital is raised, common transaction structures applied and the specific features of the various instruments.

In the trajectory of a company’s growth, the later stage is a critical juncture marked by increasing market traction and expansion prospects. This is different to earlystage financing, where the main objective is to develop and start commercialising a product and/or service. “Later stage” refers to a certain point in the life cycle of a company where it already has a proven business model, recorded significant market successes, is already or at least on a clear path to profitability and desires to scale its business and accelerate growth. The latter can be done organically, through add-on acquisitions or often through a combination of both. This is quite distinct to earlystage financing where M&A is rarely an integral part of the company’s expansion plans.

In later stages, organic growth opportunities often encompass the internationalisation of a business through penetration of new markets, widening the product/service portfolio, increasing product capacity and capitalising on other growth opportunities. The objectives to execute an M&A strategy are quite similar but can often be achieved much quicker. Also, buying an established competitor with a proven track record can be less risky, and as a result, attracting an external financing partner may be easier. On the other hand, acquisitions sometimes turn out to be unsuccessful due to poor integration of the acquired target into the acquiring company.

Growth capital is instrumental to acceleration

Equally important is the role of growth capital in strengthening the company’s balance sheet. As companies mature, the need for a robust capital base becomes more pronounced. Later stage growth capital not only provides a financial cushion but also allows for a strategic alignment between investors and management, ensuring a shared vision for the future.

The below two financing instruments are often used for growth capital in a later phase. There are numerous factors that determine which instrument is more suitable in a given situation, such as the investor’s risk/return-profile, the strength of the company’s balance sheet company, the availability of asset collateralisation, the specific use of the capital raised and, of course, the short and medium-term cash flow generation of the company. Typically, the two instruments have the following characteristics and features:


Structure: investor’s participation in the equity, which is commonly structured as straight equity or preferred equity. In the latter case, the investor has some degree of downside protection often in the form of a liquidation preference or preferred return, which gives the investor a (contractually agreed) right to priority repayment of its invested capital over other shareholders. Due to the lower risk, the investor is prepared to forego part of the upside resulting from a higher entry valuation. 

Expected IRR: depending on the situation and risk profile of the investment typically between 25% to 35% p.a. realised through the value creation of the equity of the investee company.

Risk/return profile: mostly non-redeemable and full participation (i.e. upside and downside) in the economic development of the company.

HYBRID INSTRUMENTS often structured in the form of a mezzanine facility or convertible loan.

Structure: a loan instrument that also contains equity-like features (i.e. loan conversion, warrants or some other form of “equity kicker”); these instruments often have a bullet repayment structure (i.e. repayment at maturity or exit) and are often collateralised with assets and/or shares of the borrower.

Expected IRR: again, this depends on the respective situation but is generally in the low to higher teens, i.e. 12% – 18%, with (a smaller) part of the investment return coming from the equity kicker and the majority from cash and/or PIK (“paid in kind”, i.e. accrued) interest. 

Risk/return profile: unless converted, always needs to be repaid at maturity; it offers the investor a comparatively higher downside protection given the ongoing interest payments, the collateralisation, priority in the waterfall of liquidation proceeds due to the seniority vis-à-vis trade creditors and shareholders. Still, this instrument allows some degree of “outperformance” due to the equity kicker, thus participation in the value creation of the target company.

In summary, equity is more expensive, but preferably for companies that are smaller and less “bankable”, are on a fast growth track, rather “asset-light” (lack of asset collateralisation) and plan to use their free cash-flows for expansion. On the other hand, the above debt instruments result in a lower dilution of existing shareholders and can optimise the capital structure of a company. However, debt is like alcohol – smaller doses are fine, but too much, can have serious negative effects. 

Growth Capital investors become strongly involved business partners

When it comes to growth equity capital, there are two types of investors: Majority investors, who prefer to obtain a controlling position in the company (>50% ownership) and Minority investors that rather team up with the management and take a more passive approach in developing the investee company by backing existing management. Another difference is that in majority deals, existing shareholders typically request a sizeable cash-out (and only part of the investment goes into expansion), whereas in minority deals, the investors typically provide the entire investment through a capital increase, so there is no buy-out component.

Finally, raising growth capital also means entering into a longer-term “partnership” with the investor. It’s like a marriage, albeit limited to a certain period of time, as private equity funds require a liquidity event at some point in the future, i.e. a commitment to sell the company within 4 to 6 years. During the lifetime of an investment, this partnership will be repeatedly put to the test, especially if the investee company underperforms and there are disagreements between management, shareholders and investors. It is therefore paramount that conflicts are resolved in a professional and constructive way – just like in a marriage. Divorcing a business partnership is one option (although difficult to execute), but in most cases only the second best.