The Small-Cap Edge in Buyout Funds

Research shows private equity funds focused on smaller companies are more profitable than those investing in large caps — but they are also riskier.

Illustration by II

Illustration by II

Leveraged buyout funds that invest in small-cap companies put money to work faster, re-invest a higher proportion of their funds, and are more profitable than those that focus on larger companies, according to new research from eFront.

Small-cap funds also deploy significantly more capital in the later years of a fund’s life — until eight years out — as opposed to most vehicles that invest during a five-year cycle.

“Fund size for U.S. LBO vehicles is inversely correlated with performance, speed of capital deployment and total capital commitments,” according to eFront, an alternative investment technology company owned by BlackRock. At the same time, smaller cap funds also may be riskier.

The study — called “Does size matter? In U.S. LBO, Yes” — evaluated cash flows and looked at private equity funds started in the years up to 2009 because their investments have been generally fully realized. The eFront study included data on mega, large, medium, and small buyout funds.

“Cash flow patterns uncover a wide diversity of activities, and counter-intuitively show that small cap LBO funds are extremely active in recycling capital and are likely to operate significant buy-and-build strategies,” said Tarek Chouman, CEO of eFront, in a statement.


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According to Chouman, eFront’s research is important in the discussion about the risks and benefits of different private equity fund sizes.

The findings come as private equity firms have raised a record amount of cash for ever-larger vehicles. Last year private equity funds raised more money than ever. According to early January data from Preqin, a total of 921 funds secured $453 billion in investor commitments in 2019.

The previous fundraising record was set in 2007, when 1,044 groups raised $414 billion. Investors have been pouring increasing amounts of money into the asset class over the last three years, and dry powder — money that investors have committed but has yet to be invested — has surpassed $1 trillion. All that money has resulted in huge funds and, in turn, huge deals.

According to eFront, mega-cap buyout funds may be less profitable, but they also provide predictable streams of cash flows. “Given these attributes, patient investors that are willing to handle greater risk and more fluctuations in terms of capital inflows and outflows might be better suited to looking at smaller cap LBO funds,” wrote the authors of the report.