Investment Essentials: Growth Equity

Investment Outlook

A growth equity investment strategy offers exposure to efforts focused on scaling businesses with an aim to exit via an IPO or strategic sale. The health of the IPO market is a leading indicator for growth equity as it is often the most lucrative exit path. That said, U.S. IPOs have raised $43 billion through August 2025 and are on pace to exceed $65 billion for the year, which would be an 80% increase from 2024. Halfway through 2025, the number of IPO transactions is largely flat compared to the full year 2024. Roughly 200 transactions have priced raising more capital compared to 2024, pointing to larger, higher-quality deals (all references to IPO data is based on Exhibit 1). This is relevant for growth equity as it occupies the middle ground between venture capital and buyout. The boundary lines are hard to see however, the category has evolved into much more than an intermediate private investing approach. A typical growth equity fund will invest in profitable companies that have proven business models and growing customer sets – the types of companies that can often seek an IPO exit.

Not only would a healthy IPO market be a tailwind for growth equity, but some managers tend to hold positions beyond an IPO exit. As a result, growth equity managers are often able to capture significant company growth, typically in excess of a 10% run rate, and sometimes beyond 20%.

Recent Market Trends

Growth equity assets have experienced a steady increase over the last 15 years. As the private markets expand, more companies are operating private for longer. Within this context, there has been a notable trend of high growth companies staying private for longer that arguably would have otherwise would have gone public 10-20 years ago. Consequently, there is investor desire to access to some of these larger and faster growing private companies. Despite a difficult post-pandemic fundraising environment – as valuations for growth-stage investments reset – the asset class has increased its role across private equity with roughly 20% share of total assets (Exhibit 2).

In terms of deal flow, growth equity has increased its share of private equity deals to 23%, surpassing buyout. Moreover, growth equity is on track for its largest share of private equity deals since 2013 (Exhibit 3). This has been due to the trend of more public-to-private transactions where growth equity managers have an opportunity to unlock value though hands-on growth or profit improvement strategies that would be otherwise difficult in the public markets.

The uptick in deal activity shows that some companies are more comfortable with valuations. This could set the stage for outperformance over the medium/longer term due to a thawing path to realizations, presenting a path for sponsors to monetize pent up unrealized value.

Industry Focus: Software

Growth equity managers often look for opportunities in companies that are at or near cash-flow positive with an opportunity to generate excess return by growing the business, often by unlocking product distribution and/or scaling technological innovation. With this strategy, some managers have a vertical focus based on industry expertise in areas such as software or health care.

In software, the recent valuation reset positions the space for an uptick in activity. Public market valuations (5.0x forward revenue, Exhibit 4) are below ten-year averages and presents pricing opportunities. Many software companies have grown larger by taking on private market capital, suggesting a sustainable period for larger and higher-quality IPO.

Software tends to be one of the first industries to test the IPO waters – and is one of the biggest sectors for large cap private equity buyout – due to durable revenue and high margins and cash flow. More recently, the strong after market performance of recent IPOs should be a basis for a strong software IPO pipeline.

Publicly-traded software companies have a renewed focus on efficient growth. This balance in both revenue growth and margin expansion could allow software companies to unlock incremental value and multiple expansion—ideal conditions for growth equity exits. The Meritech Software Index is seeing median ARR growth of 15% with the median rule of 40 at 34%, arguably in a “sweet spot” for software.¹

Performance Snapshot

 

Exhibit 5: Growth Equity Has Been a Steady Performer

Strategy	5-year	10-year	15-year
Buyout	16.4%	14.4%	14.8%
Growth Equity	14.6%	12.8%	12.4%
Private Capital	13.7%	11.8%	12.5%
Venture Capital	11.5%	10.3%	11.6%

Source: Bloomberg Index Services Limited, Preqin, iCapital Alternatives Decoded, with data based on availability as of Mar. 31, 2025. For more information, refer to Additional Information and Index Definitions. For illustrative purposes only. Past performance is not indicative of future results. Future results are not guaranteed.

Additional Information:

Exhibit 5:  Buyout proxied by Preqin Private Equity Buyout Index. Private Capital proxied by Preqin Private Capital Index. Growth Equity proxied by Preqin Growth Equity Index. Venture proxied by Preqin Venture Capital Index.

Exhibit 7: IPO data is based on U.S. exchange-listed IPOs that have begun trading and with market caps of at least $25 million. We exclude closed-end funds, unit offerings, and SPACs. The iCapital IPO Activity Barometer is a leading measure designed to offer forward-looking insights into underlying trends in U.S. IPO activity. It draws on seven key factors that have historically provided reliable signals of IPO activity going back to 2001: 1) Valuations, 2) Yields/Rates, 3) Volatility, 4) Drawdowns, 5) Business Conditions, 6) Investor Sentiment, and 7) CEO Sentiment. Given the indicator’s structure, the focus should be on overall trends rather than short-term fluctuations or specific levels at any given time.

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INDEX DEFINITIONS

Preqin Private Equity Buyout Index: The index covers closed-end funds captured in the broader Private Capital index including funds/strategies listed as Buyout, as defined by Preqin.

Preqin Private Capital Index: The index covers closed-end funds captured in the broader Private Capital index, as defined by Preqin.

Preqin Growth Equity Index: The index covers closed-end funds captured in the broader Private Capital index including funds/strategies listed as Growth, as defined by Preqin.

Preqin Venture Capital Index: The index covers closed-end funds captured in the broader Private Capital index including funds/strategies listed as Early Stage, Early Stage: Seed, Early Stage: Start-up, Expansion/Late Stage, Venture (general), as defined by Preqin.