The funds advised by REIA Capital are focussed on investments in Mittelstand companies. On a long-term basis, we envisage greater return opportunities in investments in small cap private equity funds than in larger cap private equity funds or in the stock market.
Performance of PE compared to shares
Source: PREQIN (2023).
PE small cap: Funds with less than 0.5 billion USD in capital.
MSCI World TR: Captures large and midcap listed companies across 23 developed countries. With 1,511 individual shares, this index covers approximately 85% of the free float-adjusted market capitalization in each country.
MSCI Europe Index Standard TR: Captures large and midcap listed companies across 15 developed countries in Europe. With 428 individual shares, this index covers approximately 85% of the free float-adjusted market capitalization across the European developed markets equity universe.
We define Mittelstand companies as companies with an enterprise value of 10-250m EUR. These investments are made through commitments into selected small and lower mid cap private equity funds by the REIA Capital Funds.
Greatest opportunities in the
PE small cap buyout segment
Source: PREQIN (2023).
PE small cap private equity funds with a fund size of below 0.5 bn. USD, PE mid cap funds with a fund size of 0.5 to 1.5 bn. USD, PE large cap funds with a fund size of 1.5 to 4.5 bn. USD and PE mega cap funds with a fund size of more than 4.5 bn. USD.
Higher return opportunities in small cap
- private equity market is non-transparent and small cap investments offer excess returns with a higher likelihood
- professional fund selection has a higher importance at investments in smaller funds
- risk mitigation through an appropriate portfolio construction
Mittelstand companies offer greater potential for performance improvements
Skilled private equity fund managers act like gardeners, cultivating small into large trees. Through performance improvements, they develop small into larger companies, employing various measures:
- higher organic growth
- professionalization and extension of the management team
- growth through substantial investments and strategic acquisitions
Attractive valuation multiples at acquisition and exit
Smaller companies can be acquired at relatively lower valuation multiples.
This has several reasons. Buyers require higher risk premiums and factor these into purchase prices. Sellers of smaller businesses often lack M&A experience and may not sell through competitive auction processes. Often, these vendors are interested in re-investments, making the valuation not the only determinant. Especially in such situation they search for a partner for a further development of their companies. In a nutshell, this leads to more favourable entry valuations for buyers.
Private equity fund managers employ various measures to achieve significant, sustainable profitability improvements within their portfolio companies throughout their ownership period of 3-5 years. Ideally, they transform small entities into medium or large companies. This targeted company size regularly leads to a higher valuation multiple and therefore to higher investment returns.
Through these performance improvements and multiples increases, outstanding private equity fund managers can generate substantial excess returns compared to their peers.
Multiplier growth follows size expansion
Source: own estimates.
However, the significant opportunities in investing in small businesses also come with elevated risks. Small companies often exhibit high dependencies on a few individuals within their management team. Frequently, these companies are focussed on few products or services targeting local markets. Such risks can be mitigated through abroadening of the management and skill set as well as an entry into new markets through M&A.
This requires an appropriate set of expertise, experience, and social skills from private equity fund managers. Hence, notable performance differences of private equity funds can be observed.
Our target – we want to identify the best performing private equity fund managers in the market.
There are numerous potential investment alternatives in this market with more than 1,000 private equity fund managers in Europe. The market is very non-transparent, as data providers focus on larger fund managers. Therefore, identifying the most promising fund managers requires relevant market knowledge, direct access to these managers, and a structured due diligence.
