Key takeaways
Growth equity remains an attractive strategy, but the opportunity set is becoming more selective. AI is shortening product cycles and compressing the period over which product-market fit stays differentiated, placing greater weight on asset quality and a manager’s ability to assess durability.
Downside protection remains structural, while AI expands the upside. Low leverage, preferred equity, and disciplined entry pricing continue to support a risk-return profile distinct from venture capital and buyouts — growth equity loss ratios have averaged 9% since 2014, closer to buyout (8%) than late-stage venture (19%) — but businesses positioned to benefit from AI may grow faster, improve operating leverage, and address larger markets than previously anticipated.
Attractive entry prices can still be found at the smaller end of the market. StepStone SPI data covering more than 7,500 growth equity transactions from 2010–2025 shows companies backed by smaller growth funds continue to trade at meaningful discounts to those backed by larger vehicles — though the discount should not be considered in isolation from the durability of the growth it prices.
Downstream demand has refocused on growth. Growth equity deals are on pace for their highest annual count since 2021, even as software platform buyouts run roughly 20% below the 2018–2025 average. Buyout capital continues to support exits, but buyers are directing it toward companies that combine strong growth with a durable competitive position.
Manager selection matters more than it did over the prior decade. As outcomes vary more across managers, the ability to distinguish temporary product momentum from lasting advantage — supported by technical judgment, sector depth, and informed networks — becomes a larger driver of returns.
Executive summary
When we last wrote about growth equity in February 2025, the case we made was fundamentally one about the strategy’s consistently strong absolute and risk-adjusted returns over the prior decade. Those results were driven by three structural advantages:
- A broad opportunity set at the smaller end of a fragmented market, where companies could often be acquired at lower entry multiples than larger, more mature businesses;
- A deep pool of downstream buyout capital that provided attractive exit opportunities without reliance on the IPO market; and
- Secular growth as SaaS business models permeated nearly every major enterprise end market.
Together, these conditions supported a return profile characterized by loss ratios that had averaged 9% since 2014, nearer to buyout at 8% than to late-stage venture at 19%, with upside approaching that of venture capital.
In hindsight, it proved to be an interesting moment in time to make that argument. ChatGPT had already captured the industry’s attention, and enterprise adoption of generative AI was accelerating rapidly, yet the full implications of large language models and AI-native applications for software economics remained largely theoretical.
Nineteen months later, investors are increasingly questioning whether this segment can operate as it has in the past. Sponsor-led software platform buyouts have slowed. AI is changing how quickly products can be built and differentiated, and the strongest smaller companies may command more competitive valuations as their growth rates and strategic relevance both increase. The strategy retains meaningful structural advantages, but the conditions supporting its historical performance are changing, placing greater weight on the quality of the underlying asset and a manager’s ability to assess its durability.
With the benefit of additional data, broader enterprise adoption, and a deeper understanding of how AI is reshaping the competitive landscape, this paper revisits the original case point by point. Downside protection remains meaningful, but product-market fit may be less durable. Attractive entry prices remain available across much of the smaller end of the market, where well-positioned companies may also use AI to grow faster and address larger opportunities. Downstream capital remains substantial, but buyers have become more selective about which businesses can maintain their position through a five- to seven-year ownership period. Against this new paradigm, we’re considering how growth equity can adapt to these changes while preserving its distinct and complementary role in investors’ portfolios.
