Buyout vs Growth Equity: What Each Can Actually Compel

The difference is not the cheque. The difference is what the fund can compel. A buyout position carries a majority of the board, so the fund can put a change on the table and carry it. A growth equity position carries the same seven vetoes and none of the room, so it can stop and cannot cause. In Nilgiri Growth Partners Fund II, invented, that is three directors of five against one.

Most explanations of these two words reach for size. Buyout is the big cheque, growth equity is the smaller one; buyout is the mature company, growth equity the fast one. Pairs of real transactions fit that description and other pairs flatly contradict it. Size was never the thing doing the work. The distinction that survives every counterexample is about permissions: what the fund can contractually make happen, and what it can only prevent. Held that way round, every other difference people list becomes a consequence rather than a definition.

Two people put money into the same small restaurant. The first one buys out three of the five people who already run it and takes the chair at the table where the menu, the hiring and the opening hours get decided. The second one hands over money for a new share of the business, sits in on the meeting, and has a written promise that the restaurant will not be sold, will not borrow beyond a limit and will not change its chef without asking. Asked which of the two paid more, the answer may well be the second. Asked which of them can change the opening hours on Monday, there is only one answer, and it has nothing to do with the money.

A distinction about permissions has to be checked against a real arrangement of board seats and contracts rather than argued from first principles, so one invented portfolio carries all the arithmetic that follows. Nilgiri Growth Partners Fund II, invented, is a closed-end growth and buyout fund managed by Nilgiri Alternatives Advisors Private Limited. The fund holds nine companies, and because it does both kinds of investing, those nine split two ways. Four of them are positions where the fund appoints a majority of the board. Five are positions where it does not. The split is the record's own, the buyout side and the growth side of the same fund, and every number that follows ties back to it.

What is the actual difference between a buyout and growth equity?

A control positionOne where the fund appoints a majority of the board. is one where the fund appoints a majority of the company's directors. A minority positionOne where the fund appoints fewer than half the directors. is one where it does not. In this invented fund those two descriptions are exactly the buyout side and the growth equity side, and they are what the two words mean here. Notice that neither definition mentions a rupee figure, a growth rate, a sector or a stage. Both definitions mention a board.

The board test is not a technicality dressed up as a principle. The board arrangement decides what happens next in every situation the fund will ever meet with that company. Suppose the chief executive has to be replaced. Suppose the company wants to borrow to build a second plant. Suppose a buyer appears for one of its three business lines. In each case somebody has to be able to say yes and make it stick, and somebody may be able to say no and make that stick too. Saying yes and saying no are two different abilities, carried by two different instruments, and the whole comparison lives in the gap between them.

Here is the arrangement in Nilgiri Growth Partners Fund II, invented, exactly as its documents set it. Every one of the nine companies has a board of five directors. At each of the four buyout holdings, being holdings 1, 3, 5 and 8, the fund appoints three of those five. At four of the five growth holdings it appoints one of five. At holding 6, Vaigai Edutech Private Limited, invented, it appoints no director at all and attends as an observer. And at all nine, buyout and growth alike, the fund holds the same seven reserved matters written into the shareholders agreement. The list of things the fund can refuse is identical on both sides of this comparison, and the only thing that differs is whether the fund controls the room where decisions are actually taken.

So when one fund is described as doing buyouts and another as doing growth equity, the useful follow-up is not how large their cheques are. The useful follow-up is this: at the companies held, how many directors of how many does the fund appoint? The question has a number for an answer, the number is written into a contract, and the number settles what each of those funds can make happen.

What is a board of five actually worth to the fund?

A board seatA vote in the room where a company's decisions are taken. is a vote in the room where the company's own decisions get taken. Three of five is a majority of that room. One of five is a voice in it. A majority and a voice are not two amounts of the same thing. They are two different kinds of thing, in the way that having a key to a door and being allowed to knock on it are two different kinds of thing.

A housing society committee of five people decides whether to repaint the building. If three of the five have agreed among themselves beforehand, the repainting is going to happen, and the meeting is a formality that records it. One member of five can argue, can put a proposal on the agenda, can vote against and have the dissent minuted, and at the end of it four other people decide. The dissenting member has not been ignored. One member of five simply cannot arrive at an outcome alone. Everything a buyout position can do that a growth position cannot comes from this one arithmetic fact about five people in a room.

Count it across the whole of Nilgiri Growth Partners Fund II, invented. Nine companies, five directors each, so forty-five director seats exist across the portfolio. The fund appoints sixteen of them. Three at each of the four buyout holdings makes twelve, and one at each of four growth holdings makes four. At holding 6 it appoints none and sits as an observerSomeone who attends a board and has no vote.. Somebody from the manager is in the room, hears everything, and votes on nothing.

Read as a share of anything, sixteen of forty-five misleads, so the number is worth pausing on. The fund does not have some fractional grip on the portfolio as a whole. The fund has an outright majority at four companies and no majority at five, and those are the only two states that matter. Averaging them produces a figure that describes no company on the list. The same trap returns in a much more expensive form when the two sides of this fund are compared on returns, so refusing to average two states is a habit worth building early.

If both sides hold all seven vetoes, what is left to differ?

A reserved matterSomething a company may not do without the fund's written agreement. is a thing the company may not do without the fund's written agreement, whatever the board decides. A reserved matter lives in the shareholders agreement rather than in the boardroom, and it does not care how many directors anybody appoints. In Nilgiri Growth Partners Fund II, invented, there are seven of them and they sit in the shareholders agreement of all nine companies, buyout holdings and growth holdings alike.

The seven are, in the fund's own numbering: one, issuing new shares or any instrument convertible into shares; two, selling the business or any material part of it; three, borrowing above a limit each agreement sets; four, changing the company's constitutional documents; five, appointing or removing the chief executive or the chief financial officer; six, approving the annual budget; and seven, entering any transaction with a related party. Seven matters at nine companies is sixty-three separate refusals this fund is able to make, and thirty-five of those sixty-three sit at the five growth holdings where it appoints one director or none.

Read that list again and notice what is on it. A sale of the business. New shares. The chief executive. The budget. A sale, new shares, the chief executive and the budget are not small operational irritations. They are most of the important things that can happen to a company. A growth position in this fund can prevent every single one of them. A reserved matter is a right to refuse, and a right to refuse produces nothing on its own, so a growth position cannot cause any of them.

Refusing feels powerful and it genuinely is, so the sentence people miss is that a right to refuse produces nothing on its own. If the founders of a company want to sell to a buyer they like, and the fund with one seat of five says no under reserved matter two, the sale does not happen. The fund has changed the future of that company decisively. But suppose instead that the fund thinks the company should be sold, and the founders do not. The fund can raise it, argue it, put it to the board and be outvoted four to one, and then nothing happens. The reserved matter only ever pointed one way, so the instrument that was decisive a moment ago is silent.

What is the difference between a veto and a vote?

A vetoA right to refuse one named thing, held under a contract. is a right to refuse one named thing, held under a contract. A vote is a share of the decision in a room, held by whoever sits on the board. A veto and a vote feel similar, and both of them are power over a company. The two behave completely differently: a veto is a switch that only turns off.

The everyday version runs like this. Because the rent agreement says so, a landlord cannot change the lock, cannot raise the rent mid-term and cannot move somebody else in. Those three refusals are a set of vetoes, and they are genuinely strong. Now suppose the tenant wants a second window put in. The tenant can ask, can offer to pay, can point out that the flat would be more comfortable. And if the landlord says no, there is no second window. Nothing in the agreement gives the tenant a right to cause building work. The protection was never a power to build.

Both instruments exist at every one of this fund's nine companies, and each of them answers a different question. The contract answers: can this thing be stopped? The board answers: can this thing be started and carried through? At a buyout holding of Nilgiri Growth Partners Fund II, invented, the fund answers yes to both. At a growth holding it answers yes to the first and no to the second. Two positions of identical size in rupees can differ completely on that second question. Control is a contract rather than an amount of money.

Where does the money go when each of these is done?

Almost everybody gets this one backwards, and the reason is that the two ideas sound as though they belong together. Buying control sounds like buying somebody out, so the money should go to the person being bought out. Growth investing sounds like funding growth, so the money should go into the business. In Nilgiri Growth Partners Fund II, invented, one of those happens to be true and one of them happens to be true as well, and there is a counterexample sitting in the same portfolio for anybody who wants to turn it into a rule.

When a fund buys existing sharesShares bought from a shareholder, so the money reaches the seller., it is buying them from somebody who already holds them. The cash goes to that seller and the company's own bank account never sees it. The company has a new shareholder and not one rupee more to spend. When a fund subscribes for new sharesShares issued by the company, so the money reaches the company., the company creates and issues those shares, the cash arrives in the company's account, and no existing shareholder receives anything.

Now the two cases from this fund's own record. Holding 1, Sahyadri Diagnostics Private Limited, invented, is a buyout position, and the fund's entry of Rs 55,00,00,000 at Fund II's Year 1 Q3 bought existing shares held by the founding shareholders. Not one rupee of it reached the company. Holding 4, Bhavani Speciality Chemicals Private Limited, invented, is a growth position, and its entry of Rs 50,00,00,000 at Fund II's Year 2 Q4 was subscribed for new shares, so all of it reached the company and no shareholder received anything.

Same fund, same manager, similar amounts of money, and opposite destinations. Control does not decide where the entry money goes. They are two separate choices made in the same transaction. Where the money goes is a question about existing shares against new ones. The fund's power to compel afterwards is a question about board seats and reserved matters. A reader who collapses those two into one will misread the very first line of almost any transaction they are shown, and will do it confidently. Confident misreading is the expensive kind of wrong.

Do the two sides produce different results, and can this record say?

The two sides produced different numbers. Different numbers are not the same thing as different results, and everything below turns on the distance between those two sentences. The pair runs as follows, and what comes after it belongs in the same breath. In Nilgiri Growth Partners Fund II, invented, measured from each entry to the fund's record date at the end of its Year 9 Q2, the four buyout holdings cost Rs 2,10,00,00,000 and are worth Rs 4,34,00,00,000, or 2.07 times cost. The five growth holdings cost Rs 1,90,00,00,000 and are worth Rs 2,86,00,00,000, or 1.51 times. Both groups sum back to the fund's own totals: Rs 2,10,00,00,000 plus Rs 1,90,00,00,000 is the Rs 4,00,00,00,000 of cost, and Rs 4,34,00,00,000 plus Rs 2,86,00,00,000 is the Rs 7,20,00,00,000 of total value.

Now remove one holding, and do it nine times over. Take holding 1 out of the buyout side and the remaining three cost Rs 1,40,00,00,000 and are worth Rs 2,31,00,00,000, reading 1.65 times. Take out holding 3 and it reads 1.89 times; holding 5, and it reads 2.48; holding 8, and it reads 2.14. Do the same on the growth side. Without holding 2 it reads 1.54 times, without holding 4 it reads 1.37, without holding 6 it reads 1.66, without holding 7 it reads 1.54, and without holding 9 it reads 1.40. Every one of those readings belongs to Nilgiri Growth Partners Fund II, invented, over the same period to its record date.

Removing any single holding moves the buyout figure across the range 1.65 to 2.48 times and the growth figure across the range 1.37 to 1.66 times, and those two ranges overlap. That is the finding, and it is arithmetic rather than an opinion. The overlap is narrow and it is real. The growth side without holding 6 reads 1.65625 times, above the buyout side without holding 1 at exactly 1.65000. Two of the nine one-holding removals land the group that removed it inside the other group's range. A comparison whose direction can be reversed by taking one company out of a list of four or five has not measured an approach. The comparison has measured which companies happened to be on which list.

The control below performs the removal, rather than leaving the paragraph above to be taken on trust. Pulling any one of the nine companies out of whichever side it sits on shows what happens to both readings at once. All nine are worth working through. The point is not that one particular removal is dramatic. The point is that nine ordinary removals, none of them cherry-picked, land the two sides on ground they share.

What does a group figure actually describe?

A group figure is a total divided by a total, and that is all it is. A group figure is not a description of the companies inside the group, and in this fund it is not even close to being one. Nine holdings of Nilgiri Growth Partners Fund II, invented, read individually, over each one's own holding period to the fund's record date at the end of Year 9 Q2: on the buyout side, 0.00, 1.80, 2.50 and 2.90 times cost; on the growth side, 0.70, 1.30, 1.40, 1.80 and 2.20 times. The buyout group reads 2.07 times and not one of its four holdings reads 2.07; the growth group reads 1.51 times and not one of its five holdings reads 1.51 either.

Dispersion is the honest half of this comparison and it deserves arithmetic rather than a warning, so put a number on how dispersed that is. Inside the buyout group of this invented fund the individual readings run from 0.00 to 2.90 times, a spread of 2.90. Inside the growth group they run from 0.70 to 2.20, a spread of 1.50. The gap between the two group figures, the thing this whole comparison is supposedly about, is 0.56. The spread inside one group is 5.17 times that gap and the spread inside the other is 2.67 times it. The variation the comparison is trying to explain is far smaller than the variation sitting inside either side of it.

Two schools compare their exam averages. School A averages 62 and school B averages 58, and somebody writes a newspaper column about what school A does differently. The marks behind them: school A's four students scored 0, 55, 78 and 88, and school B's five scored 22, 41, 45, 57 and 70. The four-point gap between the averages is real arithmetic, and it is smaller than the distance between any two students in either school. A gap that small is the least interesting number in the story. Nobody would draw a conclusion about teaching from that. The private markets version of the same conclusion gets drawn all the time.

What does this make it possible to ask when somebody hands over a report?

The people who read private fund reporting are mostly not the people who negotiated any of it, and the practical end of the matter counts for more than it looks for exactly that reason. An analyst at a bank, somebody on the investment team of a pension pool, a journalist, a student, the finance person at a charitable trust that has committed money: all of them meet these two words in a document rather than in a negotiation, and none of them can ring the manager and ask a follow-up question on a Tuesday.

So the distinction earns its keep as a question generator. Every time somebody proposes a change at a company a fund holds, there is a specific thing to ask: could this fund cause that, or could it only prevent it? And every time somebody puts two group figures side by side, there is a second: how many positions are in each group, and what happens to each figure if one of them leaves? Both questions have short factual answers, both are answerable from documents the reader may actually be given, and both of them stop a story that would otherwise run unchecked.

Not one of those questions asks whether buyout or growth equity is preferable. The question of which is preferable has no answer that could be produced from any single fund's record, and a reader who has followed the distinction has stopped wanting one. The distinction delivers something else instead: a reliable way of telling, for any position in front of them, which of two very different kinds of power the holder is carrying.