Micro-cap / LMM PE career
Hi guys,
I was hoping to get thoughts on a career in micro-cap ($0.5m - 2m EBITDA) private equity; companies which are under the radar of those in the mid-market or even lower mid-market - I may have an opportunity at a fund which has just raised $100m for Fund 1 and looking to raise $200m for Fund 2. I do not see how this is scalable without encroaching LMM territory. The thesis of the fund is to really do aggressive buy-and-build in high growth sectors, returns primarily driven by multiple arb (3-4x acquisitions with an uplift to 8x+). Returns are in excess of 3-4x.
As such, the day-to-day feels vastly different to a MM role; where there is only really very basis financial analysis, limited investment memos / modelling, rather most of your time is spent on strategy, integration (i.e. hiring) and allocating capital.
I'm not sure this is the best fit for me - would there be the possibility to move to a mid-market fund?
Sounds like you already know that you don't want to spend a career on this end of the market - as evidenced by your question to level up to a MMPE. I know one guy who spent two years at a MMIB, worked as an associate for what he describes as a "shitty little PE fund" where they worked on micro-cap deals (although he never closed a deal in his two years there). He went to business school and landed a senior associate role post-MBA at a good MMPE firm. So yes, he leveled up to a bigger firm, but they didn't really give him credit for his 2 years.
I think that makes sense, because the micro-cap skill set and the MMPE skill set are different. MMPE is a little more like conducting an orchestra - in a deal, you're coordinating diligence teams and making sure the material findings make it back to the real decision-makers (the partners) so they can incorporate them into the deal structure if needed. Micro-cap is more like you're playing all the instruments yourself. There's just not enough size in the deal for big deal teams, so if you're championing the deal, you're making pretty sweeping decisions about where the risks are and what you're willing to roll the dice on and what you'll walk away from.
Also, as you go smaller, the "hours worked per dollar of carry" equation gets worse. 35%+ IRRs are great, but if it's a $750k EBITDA business and it's not your own money being invested, it's hard to get enough carry for it to be worth doing. The only way it works is to churn through tons of deals with minimal depth and analysis, which is why it's tough to get that skill set to carry over into a MMPE role.
I'm not intending to be overly negative - there are some very interesting investment opportunities in the micro-cap world, and if I had $50M of my own money to play with, that's all I'd do. But as soon as you start splitting up the returns it makes it hard to make the math work.
Thanks. Does anyone else have anything to chime in on this?
I would never describe it as a "shitty little PE fund" - I think at this end, it's much more hands-on, as a part-time operator of many SME businesses which is an entirely different skill-set. I think this gets diluted the more deals you need to churn out however.
Are there examples of LMM PE funds in the US who play at this size and the associates / partners have done extremely well?
Thanks
I would agree with all of this. I'm all for MM and LMM PE, but the experience in micro-PE would be very different. I'd also question the fund strategy if they're looking to raise $200M and to deploy that quickly on $2M EBITDA deals. I'm sure there's some money to be made, but it doesn't sound like the strategy is going to scale that well. I'd also be curious what type of high growth, small businesses they think they can buy and multiple arbitrage quickly.
I'd almost think of this as a search fund type of experience rather than PE and if you were open to that, that's the type of experience I'd be aiming for. You're presumably one of the few/only junior guys who can help with the "M&A" piece of these businesses and then get very hands on in terms of growth, integration, and the ultimate sale. Would be cool if you have an entrepreneurial itch and could negotiate a role where you get to either embed in a small business or float across a number of businesses. If you're hoping it preps you well for a more traditional PE role, this probably isn't it for all the reasons that Layne mentioned. Not sure where you are in your career, either right out of school or looking to move on post-banking, but I'd personally only consider the role if the economics were really good. Not worth it for a normal salary in my opinion.
What background are you coming from? Is this the US?
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