Are we seeing the end of smaller PE Funds? Don’t count on it…

Are we witnessing the beginning of the end for small to mid-size PE funds? I wouldn’t count on it… Private equity may be consolidating as The Wall Street Journal article suggests. However, rather than decrease the number of middle-market PE funds, consolidation of the larger funds may actually help to increase the number of funds.

Why is that? Because in the middle-market and lower-middle market arenas, size is often the enemy of returns. And ultimately for the LPs, return is king.

As the larger funds get even larger, their capital base balloons. With an ever expanding pool of capital, the larger funds must write larger checks and buy even bigger, more mature companies. This can actually push them away from the ability to take advantage of potential middle-market targets.

The larger funds will struggle to write check sizes of $10M to $50M. Those investment amounts simply will not move the performance needle for larger pools of capital.

Therefore, as the big get bigger, they open up more opportunity in the middle and lower-middle market space for other funds.

I realize that we are in a tough funding environment, and smaller funds are feeling the squeeze. But, like challenging markets of the past, this too shall pass. There will continue to be plenty of opportunities (and room for funds) in the middle and lower middle market space.

© Copyright June 2023. Marc Patterson. All Rights Reserved.