Not every private equity firm is after the big game. Yes, amid predictions that someday $100 billion buyout funds will be common, there are still some firms, like FRR Capital, Riverside Co. and Spell Capital Partners, that are pursuing smaller prey and making money doing it. And this little secret getting out is heating up the sector. “The middle market has become very competitive,” Gary O’Brien of Minneapolis’ Benakis & Co., which advises on so-called microcap deals, told LBO Wire. “There is a realization [among private equity firms] that companies valued below $50 million trade at a more favorable multiples for a buyer.”
These smaller firms may come with come corporate baggage that their bigger brothers don’t have, says LBO Wire, such as reliance on only a couple of big clients (the loss of one having the power to doom the company) or poor accounting practices. But p.e firms that acquire such companies in the $10 million to $50 million range and put in the effort – which may, among other things, require them to hold on to such acquisitions for up to double then average five years of most private equity firm – can see attractive gains.