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.
Good 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. For example such risks can be mitigated through a broadening 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 1,200 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.
