Small and Mid-market Private Equity – A Source of Hidden Gems
- Small and mid-market companies represent a key part of the overall economy and are a hothouse for tomorrow’s leaders
- It is at the small end of the market, rather than among the biggest companies, that private equity deals with the highest return potential are to be found1
- Attractive valuations, low leverage and multiple ways to create value lead to compelling investment opportunities
- Given the breadth of the opportunity, and to avoid the common pitfalls, it is important to partner with local investment specialists who are best placed to source, analyse and invest in the most attractive deals
- A smart portfolio of direct investments should be diversified across regions and sectors and exposed to the most attractive long-term trends
- In 2019, we anticipate a more challenging environment for investors
- With a synchronisation of tightening from central banks, investors will have to get used to a world without quantitative easing
- 2019 will be a time for adjustment in terms of economic growth, corporate profitability and expected investment returns
– Global growth remains firm despite the length of the current cycle. In the US, consumption is supportive while recession risk is low globally.
– However, inflation risk is rising as markets fail to fully reflect stronger wage growth and higher oil prices.
– We are defensive on government bonds but see value in breakevens and commodities. We are also broadly positive on equities in both developed and emerging markets.
The long bull market run following the 2008 global financial crisis has created considerable sector biases in all major equity indices across regions. In our view, the risk of concentrated positions in market capitalisation-weighted indices is now significant. Attempts to time the direction of the market or predict the bursting of a bubble are seldom successful. However, in light of the market turbulence earlier this year, we believe investors should be mindful of the increased risk of traditional passive investment strategies in the current market conditions.
- We think investors do not have sufficient exposure to the small and mid-market, especially given there is no strict definition of small and mid-market across the private equity landscape.
- By investing in small and mid-market funds, we believe that investors will benefit from: exposure to a large, attractive segment of the economy, greater portfolio diversification and potential outperformance versus large and mega funds.
- In order to effectively navigate the small and mid-market and identify the best opportunities, it requires boots on the ground, local knowledge, in-depth experience and dedicated resources.