Chapter 7. From Financial Growth to Generative Growth: A Renewal of Private Equity

Since its emergence, private equity has been used as a powerful tool to support economic growth, especially through financing start-up companies, whose difficulty in accessing investment—a so-called "equity gap"—was thought to be a major obstacle to innovation. Nowadays, however, the nature of innovation processes has deeply changed, and start-ups are not the only firms upon which rests the imperative of inventing new products and services, as well as new knowledge and technologies. All mature companies, especially middle market ones, are indeed at the heart of a dilemma between making more of the same thing—notably through repeated acquisitions, operational scalability, or product extensions—at the risk of growing obsolete, and regularly renewing their activities through the development of (radically) new concepts. This chapter examines how the current private equity rationale tends to corner these companies into the first kind of "aggregative growth", as it commonly mitigates risks in the short term. It highlights that what these companies lack the most is not equity: they lack investors who can support their regenerative strategies in the long run. Therefore, this chapter conceptualizes a new class of investment strategies that is emerging to support this latter kind of growth, which we coin as "generative growth". Generative growth not only increases production and turnover, but generates innovative technologies, products, or services as well as organizations, methods, and competencies. Finally, this chapter discusses implications for lower-income economies and provides some policy recommendations on a way forward.