Historically, investing in lower middle market companies has generated outstanding returns for investors. This is due in part to a number of factors:
Typically, companies in the lower middle market are led by entrepreneurs or founders who wear many hats. Our capital is patient and allows for us to help an entrepreneur build the proper team to scale their businesses. For existing management teams, we provide capital to enable rapid growth.
Funds targeting companies with less than $100 million of revenue account for a smaller percentage of LBO capital. Fund economics are more challenging for the general partner in institutional funds with less than $150 million of assets under management.
In part due to the sheer number of opportunities, but also due to the size of the companies involved, transactions in the lower middle market are typically under-represented. As a result, more opportunities exist to buy direct or though an intermediary, where relationships play an even stronger role in deal sourcing.
Lower middle market companies typically face numerous constraints including: Limited access to capital, limited management team bench strength, less-sophisticated or non-existent business processes and systems, ownership lacking the inclination and/or risk tolerance for growth, limited abilities to access A+ management teams, and limited abilities to access international markets efficiently or effectively. An investor who combines a disciplined investment strategy with the expertise of entrepreneurs or management teams and actionable strategic thinking can generate superior risk-adjusted returns.
Buying sub-$15 million EBITDA businesses and growing through acquisitions or organic growth presents opportunities for multiple arbitrage. Typical entry points for companies with less than $10 million of EBITDA are in the 3x to 5x range, while companies in excess of $10 million of EBITDA have exit multiples in excess of 6x.
In lower middle market companies, there are typically three to four discrete and identifiable value creation opportunities; with Soaring Pine’s management, operational focus, and our ability to support either existing entrepreneurs or successor management’s efforts, we can quickly grow sales and profitability.