In a statement released on Monday, Fortitude Investment Partners highlighted the substantial opportunity in Australia’s lower middle market private equity sector, highlighting its significant size and relative under-penetration compared to the middle market.
The company revealed that while around 70,000 Australian companies are in the enterprise value range of $10 million to $200 million, just over 2,000 companies are valued between $200 million and $500 million in the market intermediate.
Additionally, the total expected deal value over five years for middle market private equity is estimated at $327 billion, more than double the $131 billion expected for the middle market.
“There are also far fewer private equity managers competing for deals in this area. Based on our analysis, we believe the five-year deal value to dry power ratio is 218:1 for the lower middle market, up from 25:1 at mid-year. market,” Miller said.
This allows managers in this segment to enter into high-quality transactions at significantly more attractive valuations, he added.
Fortitude also views investing in lower middle market private equity as a way to generate outsized returns and provide an alternative source of alpha for investors’ portfolios.
Citing data from Cambridge Associates, Miller pointed out that investments between $25 million and $50 million have historically produced IRRs (internal rate of return) of around 30 percent.
Despite a challenging investment climate, Fortitude highlighted the continued resilience of the lower middle market sector in 2024.
The company maintained a strong deal pipeline, advancing 326 opportunities toward pre-trial due diligence and advancing $75 million in deals toward exclusivity.
Fortitude notably highlighted the sale of Australian food manufacturer Birch & Waite – known for its fresh mayonnaise, dressings, sauces and desserts – to Quadrant as its “defining achievement for 2024”.
“This transaction generated an impressive return for investors, contributing to Fortitude’s overall portfolio gross IRR of over 30 percent and a multiple of over 3 times invested capital, and total net capital returned to investors at 625 million dollars,” the company said.
According to Miller, amid increasing volatility in public markets, private equity offers an attractive option for investors seeking more predictable and stable returns.
“Private equity is a very different proposition to listed markets and one of the main disadvantages is that it is relatively illiquid, with a lock-up period typically of three to five years,” he said.
“While it is certainly true that listed markets provide access to similar themes, there are a few key characteristics of lower middle market private equity that investors should be aware of.”
These include investment horizons of three to five years, exposure to niche market themes and often lower entry valuations.
Asked which sectors to avoid, Miller said: “Opportunities can be found in a wide range of companies. » These include food and beverage, technology and digitalization, healthcare and infrastructure/energy transition.
However, he warned against investing in sectors driven by “hype cycles”, which can lead to inflated valuations and unsustainable growth.
“The types of sectors we would generally avoid would be those that are subject to hype cycles that can lead to unrealistic entry valuations and no demonstrable path to developing operating leverage,” Miller said.
“We would also avoid highly cyclical companies, which do not benefit from macroeconomic tailwinds, a demonstrable competitive advantage for high-quality management teams.”
