The case for Lower Middle Market Buyouts

Constitution Capital has consistently focused on North American lower middle market buyout partnership investments and direct investments.  Constitution Capital believes that this sector of private equity will continue to be attractive to investors for the following reasons:

  • Strong Historical Returns: The historical returns generated in lower middle market buyout funds have generated stronger returns than other segments of private equity.  (Source: Venture Economics, a unit of Thomson Financial)
  • Larger Opportunity Set: Middle-market buyouts target 38,700 public and private companies with revenues between $50 million and $500 million versus Mega Funds targeting 5,300 companies with revenues of $500 million or more. The middle market is a more fragmented market for buyout investing.  (Source: US Census Bureau)
  • Lower Purchase Price Multiples: Purchase price multiples for buyouts with enterprise value of $500 million or less were on average 16% less than the companies with enterprise values greater than $500 million. Constitution Capital believes the lower purchase price multiples enhances a small to mid-cap buyout fund’s ability to complete buyout opportunities at relatively attractive valuations.  (Source: Standard and Poor’s)  
  • Decreased Likelihood of Losses: Companies involved in lower middle market buyouts have relatively lower leverage multiples than larger buyouts. These lower leverage multiples lead to a lower likelihood of hitting covenants during a downturn. (Source: Standard and Poor’s)
  • Responsiveness to Operational Improvements: Operational improvements have more impact on the types of firms in lower middle market buyouts, which are often founder-owned or family-owned enterprises that may benefit from operational and strategic guidance of private equity fund managers.
  • Potential for Multiple Expansion: For investments with successful operational improvements, the exit returns should benefit from multiple expansion with a higher exit multiple relative to the entry multiple.