The Case for Small Buyouts
RCP Advisors is proud to share the third and final installment of our three-part research presentation series: The Case for Small Buyouts.
In this series, we have leveraged more than two decades of proprietary data and research focused on lower middle market transactions to explain why we believe small market buyouts have historically produced the highest and most consistent returns in private equity.
Part I outlined the structural advantages observed in small market buyout transactions that contribute to these higher levels of return.
Part II illustrated how these observed structural advantages drive excess returns.
Part III, now available, highlights how small buyout transactions and the funds focused on this part of the market have consistently outperformed other investment strategies over long periods of time. We support this conclusion with a range of performance metrics and comparative analyses.
We invite you to explore the final chapter of this series and see why we believe small buyouts remain a compelling opportunity in today’s private equity landscape.
Key Takeaways
- Historical Distribution of Returns: Small buyouts have historically delivered strong returns relative to other private market strategies, but manager selection is critical in this space
- Over a 22-year period, the distribution of small buyout funds’ performance has had a higher median and upper quartile than large buyout funds, as well as other categories of private capital.
- When comparing the distribution of outcomes between small buyout funds and larger funds in more detail, we see that funds under $1B achieved a 2.5x TVPI or better as well as 3.0x TVPI or better twice as often as funds over $1B.
- Manager selection is critical as the left tail of the return distribution for smaller funds falls below 1.0x TVPI at around 50% greater frequency than larger funds.
- Historical Vintage Year Performance: Small buyouts’ top quartile returns have outperformed those of large buyouts’ top quartile in 13 of 16 vintage years from 2007 – 2022.
- Historical Time Horizon IRR Comparison: Small buyouts have consistently outperformed larger buyouts, as well as other categories of private capital, over 5-, 10-, and 20-year time horizons.
- Performance Compared to the Public Markets: Small buyouts have consistently outperformed the public markets on an absolute basis and when evaluated using a PME+ calculation, over 5-, 10-, and 20-year time horizons.
- Correlation to the Public Markets: Small buyout valuations have generally remained less correlated with the broader fluctuations of public markets and large market buyouts.
- We have also observed that during periods of market dislocation, returns from larger private equity investments tend to align more closely with public market performance than those from smaller buyouts.
- Deal Level Distribution of Outcome: Small market buyout transactions also have double the frequency of “home run” outcomes compared to larger buyout transactions, with only just over 22% greater frequency of some loss of capital.
To read Part III, please download the PDF below.
Source: RCP Advisors. Past performance does not predict, and is not a guarantee, of future results. This market thought piece (“Thought Piece”) and all information contained herein shall not be construed as anything other than general educational material or market commentary. This Thought Piece is not an advertisement and is being provided solely for educational and informational purposes. This Thought Piece may not be relied on in any manner as, legal, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any investment sponsored by RCP or be construed as an offer to sell or a solicitation of an offer to buy any securities or investment products.
This Thought Piece has been supplied for informational purposes only and therefore no representation or warranty is made, whether express or implied, by RCP or any of its affiliates, partners, employees, members, or agents as to the accuracy or completeness of the information provided. An investment in any private fund involves significant risks and certain potential material conflicts of interest. In considering any performance information contained herein, readers should bear in mind that past performance does not predict and is not a guarantee of future results. Investment in private equity involves significant risk, including the potential loss of invested capital. In considering any performance information contained herein, readers should bear in mind that past performance does not predict and is not a guarantee of future results. No investment or strategy implies a complete lack of risk. A private fund investment involves a high degree of risk as such investments are speculative, subject to high return volatility and will be illiquid on a long-term basis. Private fund investors may lose their entire investment. This Thought Piece is not intended to be, and should not be construed as, a general solicitation or advertisement of any investment product. The Thought Piece is not directed at any specific prospective investor. Any offer to invest in a fund or investment product managed by RCP Advisors will be made solely to qualified investors by means of a confidential private placement memorandum, subscription agreement, and other definitive legal documents, and only in jurisdictions where permitted by law.