Frustrated with mega-fund exposure, institutional investors are increasingly moving down market. CalPERS, for example, has raised its commitments to the mid-market significantly over the last few years.
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Nicholas Mann, partner and senior investment director at NEPC, says that lower mid-market and mid-market managers have more tools for value creation. Those managers, compared with those doing larger buyouts, are less reliant on leverage to generate returns, which is a profound advantage in a higher interest rate environment.
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While distributions remain muted across private equity funds, institutional investors are persuaded by how the mid-market’s advertised exit flexibility may pave the way for improved liquidity going forward, according to NEPC’s Mann.
“[Mid-market PE managers] are less reliant on cost of capital and still have a large buyer universe to sell to where they can achieve some multiple expansion,” Mann says. “Most of the DPI we are seeing is coming from the lower mid-market strategies that are building scaled platforms – doing the work of professionalizing and growing companies into scaled platforms that are attractive to larger PE sponsors with lots of dry powder.”
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