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Why the small & middle cap PE Market is considered to be the powerhouse of the US Economy?
Why the small & middle cap PE Market is considered to be the powerhouse of the US Economy
Date: 26 April 2023
When it comes to private equity investments, investors are often inclined towards large–cap funds, assuming that they offer better returns and lower risks due to their size and stability. However, this assumption has turned out to be quite the opposite in reality, with small and mid cap funds proving to be more lucrative. In this blog, we will explore the reasons as to why small and mid cap private equity funds are more attractive than their large cap counterparts and why they have caught the attention of investors in recent years. Get ready to change your mindset about investment strategies!
Let’s dive deep and understand why small and mid cap are more attractive than large cap?
The small and middle market, comprising American businesses with annual revenues ranging between USD 10 million to USD 1 billion, represents only 3% of all US businesses – yet is responsible for one-third of the country’s GDP and employment, generating combined revenues of USD 10 trillion and employing nearly 50 million people. If it were an independent country, the US middle market would rank as the fifth-largest economy in the world.
Highly Fragmented Market
The small and middle market presents a compelling opportunity for private equity investors. The market is highly fragmented, offering growth opportunities through organic growth and acquisitions. small and middle market firms tend to be more flexible, adaptable, innovative, and better positioned to seize opportunities, making them ideal for driving revenue growth and margin expansion. Additionally, middle market investments often use less leverage than buyouts in larger companies, offering lower acquisition valuations. As a result, private equity investments in middle market buyouts have the potential to generate higher returns than the larger end of the market.
Outperformance through Manager Selection
Top-tier buyout funds focused on the small and middle market have generated net IRRs of 22.1% since 2000, compared to a net IRR of 19.0% for upper-quartile large buyout funds, resulting in an incremental net IRR of 3.1% for top-performing middle-market funds. These figures highlight that small and middle market investments can lead to outperformance fortunes versus larger companies, particularly when partnering with the right managers. The impact of manager selection is underscored by performance differences of 0.8% p.a. between median midmarket and large buyout funds.
A Resilient Market
Small and middle market companies have shown a remarkable ability to withstand uncertainty, as exemplified during the 2007-2009 financial crisis when they generated over 2 million new jobs while large businesses lost 3.7 million positions. More recently, data from the National Center for the middle market shows 12.2% YoY revenue growth throughout the middle market, with nearly four out of five companies reporting revenue growth compared to the previous year. Employment growth also remains robust, with 58% of middle-market companies increasing their workforce.
Family-owned Business Opportunities
Most of the small and middle market companies are founder-owned and constantly growing. USD 30 to 40 trillion in wealth expected to be passed on from the baby boomer generation to their successors over the next few decades, many family-owned middle market businesses will require capital for management transitions and other strategic issues. As a result, only 5% of the 200,000 US middle market companies currently have private equity backing, indicating vast investment opportunities for private equity funds.
Recap
The small and middle market has become a powerhouse of the US economy, and private equity investors are uniquely positioned to benefit from the market’s continued growth and fragmentation. Through careful manager selection, compelling valuations, and opportunities for operational enhancements, private equity investors can take advantage of these unique features to generate meaningful returns.
If you’re an investor in Asia seeking access to private equity managers, Finex can connect you. Our team caters to all levels, from small to medium to large cap PE. For more information, feel free reach out to our CEO – Chris Kim or Head of the Group, Lili Wang. We look forward to hearing from you
References
https://www.moonfare.com/blog/why-mid-market-pe-matters
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Collaboration with Crow Holdings Capital
Collaboration with Crow Holdings Capital
“We are thrilled to collaborate with Crow Holdings Capital, a US-based real estate investment manager. Crow Holdings Capital consists of a cycle-tested team with a long history of investing in its flagship value-add fund series and will provide LPs access to a diversified portfolio of assets across the industrial, multifamily, and specialty sectors. We are excited to work together on their flagship strategy!”
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Finex Team Update for 2023!
Finex Team Update for 2023!
What an incredible three- year journey we have taken as a young and growing placement platform from only a few years ago! We have now become the definitive placement agent of choice for any US, EU, or Asian GP who wants to raise capital out of Asia.
Please see our highlights over the last three years–
50+ full-time time sales associates on staff.
Locally-licensed partners in Korea, Japan, Hong Kong, and Singapore
20+ sales associates exclusively dedicated to family office fundraising activity in Singapore and Hong Kong
15+ sales associates based in Korea
10+ sales associates based in Japan and Hong KongWe have enjoyed the journey and look forward to updating our LinkedIn community over the coming months on our exciting journey
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Family Offices in Singapore Growing in Quantity and Quality
Family Offices in Singapore Growing in Quantity and Quality
2022-11-30
As part of our continuing series of articles, started last week with “It’s All in the Family Offices in Singapore” (https://finexhongkong.com/its-all-in-the-family-offices-in-singapore/) focused on Singapore’s rising family offices, we take a deeper dive into why there has been an explosion of both numbers and sophistication in these entities in the City State.
With the increasingly uncertain macro-economic environment and geo-political unrest, coupled with global investors looking for improved market safe havens and attractive tax incentives, Singapore has emerged recently as a top location for establishing these family offices. According to the Monetary Authority of Singapore (MAS), the number of family offices here jumped fivefold between 2017 and 2019, and almost doubled from 400 at the end of 2020 to 700 a year later.
Earlier this year, the MAS announced stricter criteria around local investments, business spending and asset management for family offices to qualify for tax incentives. These requirements by this regulator essentially hastened the need for increasing professionalism within the family offices as they will need to hire more full-time experts, invest in technology, risk management and governance.
According to a Citi Private Bank’s Fang Ong’s recent article in the Business Times, “On top of that, we see three key trends – private capital markets, sustainable investing and philanthropy – to watch as the industry here is poised to develop further.”
Ong continues further, “We expect increasing interest from family offices in exploring private deals, including private equity and private debt as well as investing in Series B and beyond plus pre-initial public offering (IPO) rounds, due to increased turmoil and volatility in public markets and higher uncertainty in a rising interest rate environment.”
Moreover, she continues, “According to last year’s global family office survey by Citi Private Bank, the allocation to direct private equity and debt investments continues to increase substantially. Around 44 per cent of all family offices respondents reported that over 25 per cent of their portfolio was assigned to direct investments.”
In previous generations, wealthy families also preferred to earmark wealth creation and philanthropy separately. In recent times, with the passing of the proverbial leadership torch to their younger inheritors, a more holistic approach is being adopted to combine impact investing, namely ESG focus, with portfolio value creation. Finex HK discussed the recent rise and change in ESG focus in our earlier article this year titled, “ESG Investing in SEA: Is Green Turning Brown?” (https://finexhongkong.com/esg-investing-in-sea-is-green-turning-brown/)
Ong again cites, “Results of a recent survey by the Family Office Association Hong Kong show that 85 per cent of family offices are expected to raise their allocation to ESG (environmental, social and governance) or impact investing. Among this group, 64 per cent expect an allocation increase of more than 10 per cent, with the remaining 36 per cent planning an allocation increase of over 20 per cent.”
Clearly, it is becoming quite apparent that Singapore’s rising family offices will continue to evolve in their sheer numbers and sophistication in the coming years. Many in the industry predict that this evolution will mirror the size and complexity seen in other more mature family office markets, like the US.
Finex HK has one of the largest teams of 20+ associates dedicated to serving the family offices in Singapore and SEA markets. We are actively working with both GPs and LPs to help raise capital in this rising market.
Source: Faye Ong, “Singapore family office scene set to soar in sophistication”, The Business Times , August 24, 2022.
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It’s All in the Family Offices in Singapore
It’s All in The Family Offices in Singapore
By Finex Product Team
With Hong Kong’s increasing central governmental regulations and negative overall business sentiment arising from its Covid-related policies, Chinese HNWIs (High Net Worth Individuals) have migrated in large mass to its neighbour, Singapore, over the past few years. In fact, the number of new family offices established in Singapore had increased from the past three years from 27 to 2018 to 453 in 2021. Currently, there are nearly 700 total family offices established in Singapore.
Ultimately, these HNWIs’ priorities are on their personal and business succession plans and Singapore has emerged as the rising star of the region in the Asia private wealth market. According to Rachel Yoo, counsel for Corey OIsen’s Trusts and Private Wealth Practice, “Their needs have extended from personal needs to family, corporate and social needs so they will have increased requirements for external advisory services and expect to have a one-stop shop experience. For wealthy inheritors, we understand that they start with property and insurance, and then gradually expand to family trusts.”
Yoo continued that often in Singapore, newly-rich Chinese NHWIs would look towards for this wealth management advice and structuring, particularly with the tax incentives and exemptions available to single family offices set up under Sections 130 and 13U of the Singapore Income Tax Act.
Furthermore, adding further advantages are Singapore’s central location in Asia, modern infrastructure and business establishments, strong rule of law, sophisticated and highly-regulated, yet reasonable, financial market infrastructure with well-educated workforce combined with a high quality lifestyle. One can see a myriad of reasons for more of these family offices moving here to open for business to cater to these HNWIs.
Finex HK has one of the largest teams of 20+ associates dedicated to serving the family offices in Singapore and SEA markets. We are actively working with both GPs and LPs to help raise capital in this rising market.
Credit: “Asian family office surge shows no sign of slowing down as Singapore attracts new business”, 25 July 2022 (Carey Olsen)neighbour
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Hong Kong FinTech Week
Hong Kong FinTech Week
We had a fantastic time at the 2022 Hong Kong FinTech Week! An exciting platform that brought together FinTech founders, banking executives, VCs, regulators and fintech-savvy! Great insights and innovative ideas, pleasure to have met everyone there!
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Investment Promotion Week
Investment Promotion Week
We enjoyed the Investment Promotion Week organized by Invest Hong Kong. No doubt, there are a lot of new developments and shifts in the investment landscape recently, including virtual assets, ESG and impact investing among many other important factors. Nevertheless, Hong Kong is still an international financial center that still plays an important role in new initiatives, such as facilitating measures on promoting family offices in Hong Kong. Despite today’s high interest rates and volatile public market environments, alternative investments became more attractive for investors, namely data center and long-term student housing, with foreseeable potentials currently and in the coming years.
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SuperReturn Asia 2022
SuperReturn Asia 2022
Wonderful to attend SuperReturn Asia in Singapore this year and to be part of the celebration for the Singapore Office opening of Gulf Capital, as well as the SVCA’s 30th anniversary Gala & Award Dinner.
Always a pleasure to attend the biggest networking events to catch up with our peers from all around the world! The appetites are changing and evolving in the current economical environment, along with the alterations in the market landscape for long-term value creation.
No doubt that we are all “Navigating Asia’s Changing Market Landscapes” and “Bridging West and East by finding the Fastest Growth Investment Corridor”, but the primary question remains to be where the next chosen market would be? Still China, SEA, or Indo-Asia?
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Belt and Road Summit 2022
Belt and Road Summit 2022
There were fresh insights from last week’s Belt and Road Summit 2022 in Hong Kong! Plus, there were lots to explore under the Belt and Road initiative, which drives multilateral collaborations, such as the GBA and the RCEP. It was great to see our friends discussing frequent cross-border trades and potential investments within the region. Additionally, the Prime Minister of New Zealand, John Key, pointed out that we are facing some supply-chain challenges, which impacted global inflation.
We believe it is now more critical than ever to re-fuel a strong economic recovery from the pandemic and create more opportunities in the Asia-Pacific, further from the globe. -
AVCJ Singapore Conference 2022
AVCJ Singapore Conference 2022
It was a great pleasure to attend the AVCJ Singapore Conference 2022. Given the global headwinds and the redirection of capital, we highly appreciated the opportunity to learn from our fellow colleagues in the industry about the trends and stimulation in the PE and VC investment allocations, specifically in the SEA region.
Always grateful to hear the fund managers’ inspirational insights on their unique strategies and interact with investors to learn their acumen in all asset classes.
