Private Equity Funds that Buy Small Companies (below $250mm Enterprise Value) are Best Positioned to Outperform

However, these smaller companies also have the most potential to underperform… so the manager selection diligence process is key

We’ve previously posted about how smaller private equity funds (below $1 billion fund size) tend to outperform larger funds.

Smaller PE funds are tend to outperform because they buy small cap companies (enterprise value below $250 million).

Over our upcoming series of posts, we will dive into why small cap buyouts are best positioned to outperform larger deals.

So, what are some of these reasons?

1. Small Cap Companies Are the Largest and Most Fragmented Part of the Buyout Market

   • 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

   • Creates a large pool of potential buyers for businesses owned by Small Cap funds
     

2. Small Cap Companies Have Greater Opportunity for Operational Improvements

   • Small Cap funds invest in smaller/less established companies that have fewer resources and less efficient processes

   • These smaller, less well-run companies allow for significant opportunities to create value by:

     • installing skilled management teams

     • upgrading technology

     • investing behind & professionalizing the sales function

     • and many more ways to professionalize / institutionalize the business

3. Small Cap Companies Can be Purchased for Lower Valuation Multiples

   • Valuation multiples tend to be lower for smaller companies

   • If you improve the business, you can increase its valuation multiple

   • Valuation multiples for smaller companies have not risen nearly as much as the valuation multiples for larger companies

     • (despite low interest-rate environment of the previous 15 years allowing valuations to increase for all assets)

4. Small Cap Companies Have Better Chances of Being Sold for Higher Valuation Multiples (“Home Run” Potential)

   • Large private equity firms are willing to pay very high prices for high-quality companies owned by smaller private equity firms

     • These high quality companies can become a PE platform for consolidating high-growth and/or fragmented sectors

   • In one study, of the 387 realized North American private equity buyout deals that have generated a 10x+ outcome, 77% were owned by smaller private equity firms

At Gather Capital, we strive to curate a set of world class alternative investment opportunities, especially within private equity, that enable our clients to invest alongside many of these elite family office limited partners.

We are investing into a wide range of opportunities from:

• multi-billion dollar sized funds from blue-chip firms with multi-decade track records of top tier returns…

• …to sub-billion dollar sized funds led by highly sought after emerging managers.

If you’re interested in learning more about what we do, feel free to:

• swing by our website & create an account (if you haven’t already)

• grab some time on our calendar here

• shoot us an email

We’re looking forward to Talking Shop with you soon.

Sincerely,