Micro Private Equity: Generating Returns in an Expensive and Overcrowded PE Market

The number of private equity funds and other entities seeking to invest directly has risen sharply. With entry multiples at record levels and funds lowering IRR targets, how can investors continue generating strong returns from their private equity allocations?

A significant segment of the economy—companies with EBITDA up to $5 million—still offers reasonable prices and room for growth but has been largely ignored by private equity. Osceola Capital Management is one of the funds now covering this segment of the lower middle-market, a strategy they call Micro Private Equity.

Imbalance in Private Equity: Causes and Effect

Global private equity buyout deal values rose nearly 20% in 2017 from the previous year while the number of deals closed was essentially unchanged. This gap demonstrates the primary challenge now facing private equity: firms sit on a record $1.1 trillion of dry powder but lack attractive opportunities to deploy it amid additional buyout competition from corporations and family offices which has collectively pushed average purchase multiples to historic highs.

Record Multiples, Even in the Middle and Lower Middle Market

Swelling multiples are not isolated to the upper reaches of the market. When larger investors could find appealing investment opportunities and adequate deal flow upstream, they typically eschewed small and mid-sized companies in favor of the scale afforded by larger deals.