Micro private equity + real estate

Hi all,

I currently buy distressed properties and renovate them to hold or sell, backed by 2 investors I know personally (the only people I know with money, 1 family, 1 family friend). I have been looking into what I believe is classed as micro private equity, doing the same thing I am doing with properties, buying businesses worth around 700k-1M with leverage and seller financing not necessarily distressed, using profits to pay debt down whilst looking for bolt-ons, organic growth and margin expansion etc.

Properties I am buying to hold either take 30 years to pay off, or on interest-only waiting till the market rises to shrink the principle, Meanwhile, I'm seeing small businesses for sale at 3-4x earnings, essentially paying themselves off in a fraction of a time. I am thinking If I can find some stable businesses and have management in place, along with my improvements, after the first couple are paid off this could snowball into larger and larger deals. Is anyone else doing this or have any drawbacks/advice on this?

Comments (12)

May 6, 2020 - 8:47pm

I've been thinking about similar opportunities. Businesses are generally more work than real estate and there are more ways for things to go wrong both on the buy and over time. I am leaning towards real estate but the prospective cash flow / returns will be nowhere near a business at 3x earnings (assuming everything goes right). Problem with lots of these companies is that the secret sauce of the business = the departing owner. Can you talk a bit about where you see opportunities in real estate? What's the hardest part of pulling off a good deal and what kinds of returns do you target?

May 10, 2020 - 9:37am

This is the exact strategy I would like to pursue: initially run three to four restaurant / services franchise chains (Jersey Mikes, Great Clips, etc) until debt is paid off then focus on small RE retail developments near anchor sites or growing periphery markets where I can franchise an additional unit of the chain(s) I decide to focus on and lease the other bays to other complimentary tenants. Rinse and repeat.

I have not seen this strategy widely used before so am wondering what drawbacks there that am blinded to...?

May 9, 2020 - 12:39pm

You can't get non recourse debt on anything under $2M in EBITDA. I have for deals as small as $1.3M EBITDA but with a solid track record/team and putting down a good amount of equity.

Running businesses is very different than RE btw. Much much more difficult.

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May 10, 2020 - 10:13am

Are there issues with selling small operating businesses? Selling real estate takes time but with brokers and the right price it's not a challenge to sell. I imagine finding a buyer for your business may be tough and agreeing on valuation even tougher.

May 10, 2020 - 10:18am

Do some reading into search funds. These are people that specifically look to capitalize on the low multiples that small businesses trade at, both due to market illiquidity and a general disinterest in the space.

The Invest Like the Best episode with Harvard professors Yudkoff and Ruback is a fantastic introduction to the micro PE area. They specifically teach a class on search funds and have backed some of their students. They also have a guide on buying small businesses, though I have not personally read it.

Nov 16, 2020 - 10:09am

This is moderately common at LMM firms here in TX. They typically start out as real estate firms and branch out into adjacent spaces once they've had some success and built up a balance sheet.

Some examples:

  • Lantern Asset Management - started out in real estate / distressed real estate, moved into distressed corporate debt / M&A
  • RSF Partners - commercial real estate and SNFs (integrated real estate / operating companies)
  • NRD Capital - Atlanta-based real estate investor who started getting involved in the operations of retail / restaurant franchises, recently acquired (the equity of) Ruby Tuesday
  • Trinity Private Equity Group - started out in real estate, moved into owning the operations for manufacturing companies whose industrial RE they were buying
  • OTH Capital - started investing in real estate in Austin, got to know the founder community and started making VC / angel investments as well
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