Growth Equity Walk-through | ValueBridge App

Growth equity investments tend to have revenue-based valuations and negative net debt due to cash added to the balance sheet to fund growth initiatives. Cash is a drag on equity gains that causes negative gearing when enterprise valuations increase and positive gearing when enterprise valuations decrease.

Video walk-through

Guide highlights

Always start with transactions

The deal’s transaction rows — a platform acquisition, follow-on equity, an asset purchase funded with debt, and unrealized FMV — generate gross and net returns and the consolidated entry and exit metrics that build the value creation charts.

Basic value bridge

Equity gains bridge invested equity to total value through positive revenue growth, positive multiple expansion, negative leverage effect, and negative fund ownership — because revenue and the valuation multiple rise, enterprise value rises with negative net debt (cash on the balance sheet), and fund ownership decreases.

Detailed value bridge

There are no EBITDA, EBITDA margin, or gross profit margin-related value drivers for companies with revenue-based valuations. The negative leverage effect is split into negative cashflow generation and negative gearing. Cash burned to fund growth initiatives shows up as negative cashflow generation. Cash sitting on the balance sheet holds back equity gains as enterprise valuation triples, producing negative gearing. That is the opposite of debt amplifying equity gains in an LBO.

Until market metrics are selected, the market vs. manager bridge is not yet meaningful.

Add market multiples

Turn on market multiples in the portfolio company editor — manual values or a custom/system dataset. The App pulls the right multiples from the investment dates. Total multiple expansion splits into market multiple expansion and intrinsic multiple expansion (manager-driven: buying below market, selling at a premium, or improving the quality of company revenue). Market multiple expansion feeds market-driven return.

Add addressable market data

Turn on addressable markets — CAGR, total growth, or a dataset. Revenue growth splits into addressable market growth and market share growth. Addressable market growth is also added to market-driven return.

Sector debt ratio and excess gearing

Keeping target sector debt ratio at the 0% default gives managers full “credit” for any gearing-driven gains or losses. This often makes sense for growth equity deals, where gearing is a smaller value driver (compared to in buyouts).

Setting sector debt ratio to a small, negative number (e.g., -5%) defines an allowable amount of cash on portfolio company balance sheet. It splits total gearing into sector gearing and Excess gearing so less of the cash drag is attributed to the manager.

Four measurements of the market vs manager split

The same market vs manager split appears in absolute ($) value creation, times money (relative to invested equity), relative (%) share of total equity gains, and value creation IRRs (annualized returns that account for capital and time).