Merrill DataSite Just Released Report on Dec 18th: The Rise of SME Private Equity — Getting Things Into Proportion

Share Article --There are over 25 million companies in the U.S., almost eight million of which have at least $500k of annual revenue. However, very few companies are of a size and scale to be able to attract outside, professional capital.

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The Rise of SME Private Equity — Getting Things Into Proportion

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Interview with Jay C. Jester, Managing Director, Audax Group, November 2012

There are over 25 million companies in the U.S., almost eight million of which have at least $500k of annual revenue. However, very few companies are of a size and scale to be able to attract outside, professional capital. Most of these small businesses operate well below the floor where institutional capital seeks to invest.

Since 1999, in contrast to most scale institutional investors, Audax Private Equity has focused on the small end of the private company world. Merrill DataSite spoke to Jay C. Jester, managing director at Audax group, about why, even as the Audax funds havegrown, the firm has continued to target this often overlooked part of the global economy.

Size Matters

Arguably, while there are many small funds, the lion’s share of private equity dollars are concentrated with larger funds chasing large deals. According to Pitchbook, almost 75% of un-invested private equity is concentrated with funds larger than $1billion. The huge number of small businesses represents a massive, yet largely untapped opportunity that should be very attractive to PE investors. However, there continue to be several factors that keep most investors focused on chasing larger deals in the very competitive middle market.

So, why aren’t more dollars directed towards the small deal universe?

According to Jester, there are five factors that prevent more funds from fishing these waters.
1 It’s a difficult fundraising environment. With a challenging global economy, there are not as many dollars targeting PE. In general, fundraising is expensive and difficult to do, so it will be very difficult for new, small deal funds to get raised.
2 Downward pressure on GP Economics. This pressure will have less impact on large, established funds, but will make operations very challenging for new and small funds.
3 Scale and resources. “Closing” and “monitoring costs” don’t scale with deal size. In other words, it takes as much effort, time and expense to close a small deal as it does a large one, which adds to the economic pressure on small funds.
4 Regulations. There are a lot of new reporting and registration regulations associated with PE of all sizes. Large funds have the infrastructure to handle this administrative burden, while smaller funds don’t, which obviously presents them with a big challenge.
5 Sourcing. This is probably the biggest issue. Large deals tend to come from a small handful of global investment bankers, while tiny deals can come from anywhere. In order to find the best small opportunities, you need a very efficient and well organised business development machine. While a regionally focused fund might be able to compete in a certain geography, it is challenging to build an international brand with a small platform.

“Yes it is a ton of hard work and it takes a tremendous amount of focus, but I really like our position today” says Jester. “I think our competitor set will continue to thin out because of the five factors I’ve mentioned, and I’m really excited about the prospects in the small deal market – particularly over the next decade.”

Widening the buying audience
Jester believes that the very same conditions that make the U.S. small deal market attractive also exist in Europe. In addition, relative to the U.S., the European market is less developed and far less crowded. While Private Equity, particularly small private equity, is not as commonplace as it has become in the U.S., he feels that it will continue to grow as an asset class in those countries and will become an increasingly viable alternative for private companies.

“Based on the numbers I’m seeing, I believe that this could be a really interesting time to be a small deal investor in Europe,” states Jester. “Smaller funds just need to find a way to handle the pressure, perhaps by clubbing together on back office functions, or partnering with larger funds willing to diversify. A great way to do this is through networking and finding ways of working together. This is why organisations, like the ACG, function so well for dealmakers to meet each other, share ideas and potential projects.”

Preparing for success
PE investing is always demanding, but the industry will face significant challenges going forward according to Jester – particularly in the next few years. Both investors (funds) and owners would be wise to actively adjust their business models to face these new economic realities. ACG is a great place to begin that transformation. “Much of the development of the U.S. middle market has been supported and fostered by the ACG global network. This institution will be increasingly important in the formation and adaptation of the European small deal market as well” concludes Jester.

About Merrill DataSite
Merrill DataSite is a secure virtual data room (VDR) solution that optimises the due diligence process by providing a highly efficient and secure method for sharing key business information between multiple parties. Merrill DataSite provides unlimited access for users worldwide, as well as real-time activity reports, site-wide search at the document level, enhanced communications through the Q&A feature and superior project management service - all of which help reduce transaction time and expense. Merrill DataSite’s multilingual support staff is available from anywhere in the world, 24/7, and can have your VDR up and running with thousands of pages loaded within 24 hours or less.

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As the leading provider of VDR solutions, Merrill DataSite has empowered more than two million unique visitors to perform electronic due diligence on thousands of transaction totalling trillions of dollars in asset value. Merrill DataSite VDR solution has become an essential tool in an efficient and legally defensible process for completing multiple types of financial transactions. Learn more by visiting today!

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Alexis Fox-Mills
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