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?
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?
just lost my acquisitions analyst position in RE, let me know if you could use an analyst. I can help renovate shit too
If you have investors backing you on 700k-1M deals. You should look into opening franchises (dunkin, subway, 7/11) up and hiring management to run them. Much lower risk and still racks in profit. Could also open up shop at some of ur developments.
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...?
Huge capital hog with awful fcf lol
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.
You can find non-recourse debt if you know how to pitch it correctly, but it is very likely not going to be at senior bank interest rates.
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.
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.
Bump. Anyone involved in this space (Micro PE / REPE)? Guessing this would be defined as deals ~$500K - $5MM.
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:
If, man. If.
I spend a lot of time on this end of the market. I think it's the last great inefficient marketplace for investors to find alpha. The problem is, because the opportunities are so small, you can achieve great IRRs consistently and just not end up making that many dollars. Then, once the deals are larger, the playbook doesn't work anymore because the market tightens up (or maybe the inefficiencies are just different).
There's no free lunch. I would suggest that people spend time in micro-cap if they love working with small companies and how to use playbooks and structure to squeeze better performance out of everyday folks. If that's not appealing, then this is going to be an awful grind.
To be successful in the micro-cap arena, here are a few things you need to be very comfortable doing:
All in all, it's a viable strategy for someone managing their own money, and it gets tougher when it's someone managing outside money, because there just aren't enough dollars to go around. For the sake of argument, let's say you put $5M to work into five deals over two years, and then got a 25% IRR for a five-year hold and tripled-ish your money. Depending on your LP/GP structure, that's probably $1.5M-2M to the GP for seven years of work. Even if you do it all yourself, that's $200-300k per year, and someone with the skill set to do this well isn't working for $200-300k per year. So the only way to juice that is to find higher returns (aren't we all) or to do larger deals (like all the other fundless sponsors).
If it's your own money, then the model works way better. I'd happily pay myself a few hundred k a year to manage my own money.
What are your thoughts on the permanent equity model that seems to be trending in the micro space?
I don't know how much it's trending - I know Permanent Equity (that's actually their name) has a 25-year fund to invest in lower middle market businesses, but I don't know of anyone else who has that arrangement. I think plenty of small family offices have that vision, they just don't necessarily say it in those terms.
As I said above, it's a vertical integration question. If I have capital, and I'm an investor, then if I invest it on my own, then I get both the returns on my capital and the carry / "gross margin" that I would have captured if I were a GP investing other people's money. That could be a compelling equation to me on a dollars-per-time basis.
Micro PE is hard, there are soooo many tiny under $1m - $5mm businesses that aren't worth the headache.
But I can provide my take.
I opened up a M&A shop and sold it at a 6.5X EBIT. The only reason I was able to get it sold at that price vs a 1.5X EBIT was because I convinced my Executive team to stay on for 2 yrs while I took a consulting position at the PE firm.
Making over $15m off the 5 yr run I had,
I also realized how hard it is to find a good business or property, a serious seller, & at a good price.
SO I started to pursue minority stakes in $10mm business (ie - 10 to 25% stakes) This strategy allowed me to make deals happen.
I'm able to achieve a cash on cash ROI (pretax) of around 25% annually.
But lately I started to think about acquisitions in countries outside USA & Canada.
For example: There are good logistics companies in the UAE and the UK that have a lower EBIT multiple.
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