Part III: Why Small Buyouts Outperform

How Fragmentation, Market Size and Capital Dynamics Drive Small Deal Outperformance

Author

Matthew Podlesak
June 14, 2024

This is Part III of our series on why Small Buyouts Outperform.

Part III: How Fragmentation, Market Size and Capital Dynamics Drive Small Deal Outperformance

Part IV: Greater Opportunity for Operational Improvements (coming soon)

Part V: Ability to Buy for Lower Valuation Multiples (coming soon)

Part VI: Better Chance to Sell for Higher Valuation Multiples and “Home Run” Potential (coming soon)

Part III: How Fragmentation, Market Size and Capital Dynamics Drive Small Deal Outperformance

Why are the dynamics in favor of small buyout deals? Two key reasons.

1. Small buyouts = the largest, most fragmented segment of the buyout industry… 115,000 companies generating over $2 trillion of revenue

2. The dry powder raised for small deals has stayed the same size… while upstream, larger funds that are ultimate buyers for these small deals have ballooned with dry powder

1. Small buyouts = the largest, most fragmented segment of the buyout industry

2. The dry powder raised for small deals has stayed the same size…

…while larger funds upstream that are ultimate buyers for these small deals have ballooned with dry powder

86% of private US companies are considered small ($10-$100mm Revenue), but only 22% of capital is raised by these small companies

Significantly more capital/dry powder is held upmarket by “Large Cap” and “Mega” private equity funds.

This dynamic creates a large pool of potential buyers upstream for portfolio companies owned by Small Cap funds

  • Large private equity funds keep raising more and more capital to buy large companies (of which there are few)

  • Small PE funds are not raising more money than before (more companies to buy; less competition to buy them)

  • This dynamic is creating a growing pool of capital eager to buy the companies that smaller PE funds can grow

As a reminder… here is an overview of investment performance by company size… under $250mm has potential for highest outperformance