Growth Assets: New Opportunities, New Rules

Raphaëlle d'Ornano
6 min readSep 1, 2022

The opportunity for Private Market Investors

Don’t expect an easy transition back to work after the summer holidays. The economy and the markets have only grown more challenging in recent months which means investors must continue to adapt to this increased turbulence. However, megatrends are shaping the Private Markets investment behavior across Venture Capital (VC) and Private Equity (PE), representing a fantastic opportunity for pushing disruptive investment theses.

Those possibilities can be hard to see amid the uncertainty being driven by many of the same adverse macroeconomic and geopolitical factors that were already making 2022 a complicated year before vacation season.

Let’s start with inflation. While there have been some signs of easing in places like the U.S., Federal Reserve Chairman Jerome Powell spooked the markets last Friday by making it clear he’s still in inflation-fighting mode. That means higher interest rates, the Fed’s main tool for combatting rising prices, which heightens the risk the economy will slip into a recession. Meanwhile, rising energy costs across Europe are a source of additional stress, with Goldman Sachs recently warning the UK could see inflation hit 22% later this year.

These trends are interlinked with the geopolitical picture, particularly the war in Ukraine, which has disrupted food and energy supply chains while creating a humanitarian crisis. With production and shipping still lurching back to some kind of normalcy amid the lingering pandemic, and employers having a hard time filling jobs, the economy can still feel like it’s trying to find its footing.

This dynamic has hit U.S. tech stocks particularly hard since the start of the year. Future earnings are central to their valuations, and we’ve seen growing signs of caution such as hiring slowdowns or freezes.

And yet, I chose the word “complicated” to describe 2022 because we haven’t seen anything like a total collapse. Indeed, there are some surprising bright spots that allow for optimism.

For instance, the most recent tech earning announcements included some strong results, particularly among cloud stocks, that helped stabilize public market attitudes. There is even a feeling that we may look back on this period and see that we hit a kind of bottom in June in terms of tech’s anxiety.

Perhaps more importantly, three important megatrends that accelerated during the pandemic are still going strong and continue to define private markets and investment trends:

- Digitization: Tech is everywhere now and it’s transforming everything. The tech companies enabling digitization are still poised to reap huge returns.

- Decarbonization: The transition to lower energy consumption has never seemed more urgent with those soaring costs and the brutal scenes of climate change seen and felt around the world in recent months.

- Sustainability: New models continue to emerge to promote a circular economy, and greater diversity, equity, and inclusion.

Thanks to these megatrends, private market investors are poised to make a disproportionate impact despite the uncertain context because they are free from short term pressures. Hence the imperative to search for those businesses across all sectors of the economy, with strong economic fundamentals, who benefit from these megatrends and who are resilient enough to face the current headwinds.

Introducing “Growth Assets”

We call companies that fit these profiles Growth Assets because we are convinced that they will deliver durable long-term growth and value for investors, even in this uncertain macro and geopolitical climate.

As mentioned above in this article, Growth Assets can be defined as companies across all sectors of the economy, with strong economic fundamentals, that seize the opportunities of these three megatrends — Digitization, Decarbonization and/or Sustainibility, while being resilient.

It’s important, in this context, to clearly define “resilience”: A company’s ability to maintain its growth and profitability trajectory despite a shaky context.

Per our definition, Growth Assets fall into two categories:

- The Disruptors: These assets enable digitization, decarbonization, and sustainability by providing the technology through a software license and access to a platform, for example. They also include infrastructure, and a lot of climate tech companies like Volta Trucks. Last, they include actors of the circular economy, think of Vestiaire Collective or Back Market with their platforms that create marketplaces for reusing or refurbished goods.

Disruptors include high-growth tech companies — mainly VC backed — but also PE backed assets who have gone through disruption of their own business models (or are in the process of doing so). For example, within the software segment, these would be companies that transitioned from perpetual license model to the cloud subscription model in recent years.

- The Agile Incumbents: Rather than enabling these megatrends through their proprietary technology (at least initially), Agile Incumbents place digitization, decarbonization and/or sustainability front and center of their business models. This second category is potentially much broader. These Agile Incumbents are PE-backed companies for the most part, many with an active Add-On playbook, and their strength is to be at the core of our economies.

Tessi (PAR:TES) is a great example of an Agile Incumbent. The company, a provider of document automation solutions, has succeeded in its digital transformation, and as a result developed a strong recurring revenue stream across its activities (and not limited to the strict license revenue generated by its internal software solutions), notably in its Document Services segment (from which a majority of the Group’s revenue is derived. Such Agile Incumbents do this through M&A with new pieces impacting the whole group and catalyzing internal digital transformation.

Beyond these distinctions, both Disruptors and Agile Incumbents deliver high growth (>15% YOY). But understanding their value and assessing their resilience requires new frameworks.

New rules, new metrics

Growth Assets have their own set of rules. Understanding them is key. If investors want to play offense, these rules must be defined and mastered.

Understanding a Growth Asset requires a future-oriented approach. Looking backward at historical indicators is not enough. Either these companies didn’t exist a few months ago in the case of Disruptor start-ups, or their business model is so different that there are no easy comparisons. To grasp their full value truly and precisely, it is essential to understand their steady state. In other words, knowing what operating margins and cash flow generation will look like when the business is at maturity. This will enable the predictability required in PE investments.

Understanding Growth Assets requires a holistic approach across key pain points. To appreciate durable and sustainable growth, multiple factors must be considered to fully grasp the value creation potential of the company. How solid is the company’s ARR? Are there regulatory issues? High-flying Sorare, for example, has made a big splash with its NFT-driven fantasy sports platform. But regulators are starting to ask whether it’s a gambling business, which could result in new shackles on its growth.

Finally, understanding Growth Assets requires a multi-timescale approach. This is more than just the hazy notion of long-term thinking. Rather, multi-timescale means investors must understand both the short-term implications of a key issue through its impact in the financial statements and the longer-term implications influencing the company’s value at exit. Take decarbonization. When going on that path, an investor must accept that results may fluctuate with first temporary spikes in emissions rather than a steady trend to net zero. Investors need to understand the continual performance, from investment to exit, while judging success by the longer arc of these metrics.

Rethinking Due Diligence to highlight opportunities on top of assessing risks

To invest in Growth Assets more confidently and aggressively, a new form of due diligence is needed. Because not only must due diligence allow investors to understand the risks of these new and/or changing business models, but it must also clarify the opportunity. Can an investor truly measure the potential of a company to disrupt a sector and created a durable, resilient business?

The answer is yes.

Leveraging our firm’s years of experience working with some of the most innovative startups and forward-looking investors, we’ve developed a track record for delivering the right metrics to analyze the performance of high-growth companies. Now we’re turning our expertise to help investors find these Growth Assets.

Next week we’ll detail this new approach to due diligence and our new Growth Asset due diligence approach. Stay tuned.

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Raphaëlle d'Ornano

Managing Partner + Founder D’Ornano + Co. A pioneer in Hybrid Growth Diligence. Paris - NY. Young Leader French American Foundation 2022. Marathon runner.