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US small buyouts: Exploiting inefficiencies in the world’s most efficient economy

OpinionsUS small buyouts: Exploiting inefficiencies in the world’s most efficient economy

Schroder Adveq believes the 300,000 small family-owned businesses and corporate divisions dotting the US landscape present a compelling opportunity for investors, explains Ethan Vogelhut, Head of Buyout Investments, Americas, at Schroders.

Schroder Adveq believes that investing in US small buyouts can provide a compelling, high-returning complement to an investor’s large buyout exposures. However, there are a number of hurdles causing some investors to overlook this asset class.

The attractiveness of the US economy has made it one of the most efficient markets globally for private equity and has allowed the asset class to generate strong returns for decades. However, there are still areas of inefficiency to be found, particularly at the smaller end of the private equity market, which can be capitalised on to generate outsized returns.

Inefficiencies still exist

These inefficiencies are structural in nature and exist largely because of the sheer number, geographic dispersion and ownership structure of small US companies. Specifically, there are over 300,000 small family-owned businesses and corporate divisions dotting the US landscape. This vast market lacks the same intermediary coverage that large companies receive and presents transformational opportunities to skilled, operationally-oriented small buyout firms.

There is robust appetite from cash-rich strategic acquirers and larger private equity funds that are willing to pay high multiples for growing and successful businesses. A small buyout firm with a repeatable value creation strategy can help realise these rewarding exit opportunities and in doing so, help you generate attractive returns.

Obstacles to accessing smaller companies

Despite wanting to access US small buyouts, many investors face constraints preventing them from doing so. Some common limitations include:

  • The average investment size that institutional investors want to deploy is too large
  • The diligence and effort required to find, select and commit to multiple small funds is high
  • Inadequate coverage of over 1,000 small US buyout firms

It is a misconception that this segment of the market is therefore out of reach.

Find the right partner

The best way for investors to access these smaller companies is through a partner that is dedicated to US small buyouts. Such a partner will possess a replicable playbook for covering the sizeable landscape of small US buyout firms and have access to the best funds and transactions. Good market coverage requires rigorous organisation, active networking and the use of technology and databases to be effective; a dedicated partner will already have these capabilities in-house.

In constructing a small buyout portfolio, we advocate considering the following factors:

  • Life cycle diversification: Ensure your partner can offer you access to both repeat top performing managers, and high potential emerging managers so that you can diversify your portfolio by firm lifecycle
  • Investment type: To accelerate performance, consider a blend of transactional investments such as direct co-investments and secondary fund commitments, alongside the more traditional primary fund investing, the results of which can take time to develop.

US small buyouts allow investors to acquire companies in a highly inefficient market and, post transformation, reap the benefits of selling into the most efficient exit market in the world. Schroder Adveq believes that investors should capitalise on this opportunity in partnership with a trusted provider committed to constructing performance-oriented portfolios in this attractive investment segment.

Please find the full report as a PDF here.

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