We are interested in later stage, private growth businesses, and look to provide between $20-$60 million in either equity or credit financing. We mostly invest in technology and healthcare companies, but we investigate all growth sectors. While the appropriate “stage” of a business is highly bespoke to the business model and industry, the companies we’ve invested in recently have median trailing 12-months’ revenue of just under $30 million.

No. However, we typically look for situations where we expect to be the last required private financing prior to either profitability or an exit. Our investment is often the capital that helps companies scale through to consistent cash flow generation.

We created the growth credit strategy in 2016 because we identified a large white space in an underserved market – companies wanted an alternative to the traditional venture debt lenders that only offered shorter-term credit solutions that required contemporaneous equity investment support from a short-list of pedigreed venture capital sponsors. We believed that Morgan Stanley Expansion Capital could provide a more flexible capital financing solution to a much broader set of potential borrowers, especially given the platform’s successful experience in underwriting and managing equity investments in later-stage growth-oriented businesses. Over the course of the following years, through multiple fundraising cycles, this thesis was confirmed during periods of slower equity market growth that drove companies to raise alternate forms of credit capital. Our private credit strategy is now an integral part of the Morgan Stanley Expansion Capital story, allowing us to provide a broader range of growth capital solutions to companies in our target size, geography and industry verticals – all backed by the strength of the Morgan Stanley brand and network.

The platform does not cross-invest credit and equity into a single company due to the conflicts of interest that would arise and the decision between credit versus equity is made jointly by the company’s management team and the Expansion Capital team. Importantly, all of the members of the Expansion Capital team work on both credit and equity strategies, allowing for a continuity of relationship that ensures we are providing a company with the most optimal capital solution and efficient process. Typically, a company is a good fit for credit if they want to fund growth initiatives or refinance an existing lender but market dynamics make raising traditional equity suboptimal due to valuation, dilution, or governance implications. Our credit provides companies with a unique opportunity to raise a larger financing round with a 5-year interest only period without the need for additional equity support. Our equity is often most effective in situations where a company is continuing to accelerate capital-efficient growth and wants a capital partner to help guide the next phase of its journey towards becoming a scaled market leader.

Our diligence process for equity and credit is similar. For both strategies, we typically engage with companies that have revenues of between $10M - $100M with a clear path to cash profitability that is not reliant on additional outside capital. On our credit side, we favor more scaled businesses, ones that are closer if not already profitable, and like to ensure there is a maximum 25% loan to enterprise value cushion on our investment. We frequently take board seats alongside an equity investment whereas we remain as board observers in our credit investments. The advantage of our platform is that a company can use our equity or credit for similar uses: growth and expansion funding, refinancing, acquisitions, secondary liquidity, and working capital.

Every situation is unique and we try very hard not to pre-judge. I go into an initial meeting hoping to find answers to three broad questions. Why do these individuals know more than others about a specific problem? Which customers will find the most value in their solution? What is their “secret sauce", in other words, what method of business or technical edge do they have that is critical to success but not necessarily obvious?

Executives need a cogent strategy. I look for breaks in the logic. Strategic inconsistencies should be impossible to uncover in a one-hour meeting. While there are countless other markers to track, the key is to keep an open mind. Most entrepreneurs I meet have advanced degrees and have spent much more time thinking about their businesses. It’s always humbling to remember that fact prior to a meeting.

Over the years, we have increasingly emphasized capital efficiency as an indication of investment fit. We find that limited access to capital often spurs innovation. Entrepreneurs and managers that prevail despite tight finances often find ways to succeed that might not be obvious to those with ample access to cash.

Since we’re minority partners, our relationship with management must be grounded in trust. We also like managers who look for truth in data and modify tactics based upon data. Good data is the essential ingredient to good strategy. Without it, everyone is basically guessing what might work and even worse, guessing why something failed. You can build some very strong businesses with a management team grounded in trust and data.

Every Expansion Capital senior investor has spent a full career at Morgan Stanley, so we understand how the broader franchise can benefit even the smallest of our private companies. Also, since many of our companies are too young to have developed much brand equity with customers, business partners, or prospective employees, we consistently hear that an investment from Morgan Stanley Expansion Capital provides a globally recognized stamp of quality and professionalism.

What I find rewarding about our strategy is that no one succeeds unless the entire pie grows and everyone gets their fair share. When your investment strategy targets two- to five-year holding periods, you get the chance to build incredibly close relationships with entrepreneurial teams. The vast majority of business owners that we work with have sacrificed both time and financial security and have a broad spectrum of professional and personal concerns. Seeing the impact and benefit that success has on our entrepreneurs is very gratifying.