Written by Rami Cassis
Put in its simplest form, the very general definition of “investing” is to make a deposit, with the hope of making a profit on this initial outlay.
If only things were this simple!
When you delve a little deeper, this seemingly simple concept becomes vastly more complicated. What might work well for one investor will be completely alien to another. For example, a family office operating as a private equity firm, acquires individual, established, companies outright and oversees their day-to-day operations, with the aim of growing the company, either by market share, profit margin, or size.
This type of strategy is called growth investing. However, this method isn’t one for everyone.
Other family office investors, or private equity houses, might want to focus on start-up companies. Others might specialize in sector-specific companies in certain geographical regions. The choice is vast. And that’s before you consider other investment methods – everything from government bond investment to Exchange Traded Funds (ETFs) or individual company stocks.
As growth investing is our favoured approach, let’s take a moment to examine what, exactly, this means, in a little more detail.
Growth investing is an investment style and strategy that is focused on increasing an investor’s capital. In our case, this means the capital that has been invested in the acquisition of the company, plus any further capital invested to help the day-to-day operations of the business.
As growth investors, we typically invest in growth stocks—that is, companies whose earnings are expected to increase at an above-average rate compared to their industry sector or the overall market.
However, there is a lot more to it than simply throwing cash at a firm, sitting back and watching it grow. You must nurture the company, get to know it, and work alongside the skilled management team that will already be in place. In fact, one of the key roles of a growth investor is to look closely at how we can complement the skillset that is already in place – to bulldoze over the existing status quo and its established methods of working, without good reason, will achieve nothing.
This type of investment will therefore suit an established company that, for whatever reason, is looking for a new owner, but has strong growth potential and a solid, established team in place.
It is also dangerous for a growth investor to focus on an exit strategy for the company. This is where a growth investor might differ from a typical private equity house, which often has a set horizon in mind for selling the company on. A growth investor looks for the long-term and to encourage as much organic growth as possible.
Growth investment is therefore just one type of investment – but one that isn’t for everyone, and certainly one that needs some very specific qualities to be successful.