Karl Adam, Partner at Monument Group, recently spoke with Unquote editor Greg Gille about the opportunities for lower-mid-market managers in an industry where the biggest brands seem to get bigger every year. Below are some excerpts from their conversation, which is available to Unquote subscribers in full, here.
GG: [With mega-buyout funds and big name-brands dominating capital raising in recent years], Does that call into question the intrinsic attractiveness of smaller funds?
KA: No, I would say that the lower-mid-market remains a fundamentally attractive environment for PE funds. For instance, the BVCA’s latest PE & VC Performance Measurement Survey shows that “small PE” has outperformed all other sub-categories, including “large PE”, over a 10-year time horizon. So from a performance perspective, the smaller end of the market should remain firmly on the radar for investors.
If you think of the current environment – with fierce competition for deals and high valuations in most sectors – the intrinsic qualities of funds in this bracket stand out even more. The lower-mid-market offers greater opportunity for a PE firm to acquire companies outside of a competitive process, which should result in more favorable entry valuations. And once invested, the GP’s ability to make fundamental operational changes and dramatically grow EBITDA is often higher than in multi-billion-dollar companies.
Furthermore, the executives of the PE firm itself are primarily focused on generating outsized returns. Managers of large asset management firms often earn huge and stable management-fee incomes, so firms where carry is a bigger proportion of managers’ overall compensation better align with the interests of investors.
GG: How would you advise lower-mid-market managers to position themselves in order to maximise their chance of success on the trail?
KA: Even in the current crowded fundraising environment, these managers can certainly be successful in fundraising. One of our main pieces of advice would be for them to emphasise the benefits that a relatively small fund can provide investors. The opportunity for investors to be a meaningful investor, perhaps with an advisory board seat, will appeal to a large segment of the institutional investor universe. Better access to co-investment opportunities, regular and direct dialogue with the most senior people at the GP, and other factors related to access can all be strong differentiators in the current market.
Another key is to focus the messages on the differentiation and high alignment that funds in that bracket can offer. Some features that may appeal to investors are a large GP commitment to the fund, as well as the absence of any distractions stemming from other complementary funds or conflicts of interest that other business lines may pose. Investors are also drawn to a constant focus over multiple fund series on a manager’s “sweet spot” market opportunity.