Working in private equity sometimes provides an interesting vantage point. It’s a job that is a mix of being in tune with macro trends but also requiring attention to the minutia and ultimately investing in one of the hundreds of similar companies you end up evaluating. In finance terms, the job is both riding the beta (i.e., picking which markets) as well as trying to identify the alpha (i.e., betting on which company is going to become a winner in such a market).
But getting alpha is hard (some researchers may even argue getting alpha consistently is very rare). And this has led to a few phenomena I have observed over the years, namely (i) the largest PE funds becoming more and more like allocators (i.e., beta-riders; sorry friends working in mega funds, I am generalizing); (ii) Funds becoming sector-specialists (i.e., beta is pre-determined, so you can focus on generating alpha within a few select markets); and (iii) Funds going down-market (i.e., being a small player in a market so your performance is less tied to the overall market performance / beta). The last phenomenon is what I want to talk about in this post.
The “down-marketizing” seems to be happening in a few ways. Some funds are deploying M&A at massive scales, often starting with a company that would be considered way too small for the fund size they have (e.g., Alpine Investors). Some funds are deploying a more typical playbook—buy a company with scale and add a bunch of smaller companies around it (e.g., Audax). And lastly, there has been an explosive growth in the number of search funds, which are basically micro PE funds. And all of this is happening during a period of all-time high in dollars allocated to private equity.
There are many consequences from this “down-marketizing.” One that most seem to focus on is the increasing valuation, and consequently, declining returns. But what I find to be a more interesting observation is the transfer of wealth—from Wall Street investors to Main Street business owners. Emphasis: transfer of wealth to even the small business owners of Main Street, which were historically considered too small, too niche, or too risky to invest in.
Another vantage point that I have is that my father is an accountant with mostly small business clientele. And never would I have thought that my world of private equity investing would collide with his world of small business accounting. But about a year ago, I got a call from my father, who out of the blue asked if I knew of Greenbriar Equity. I said yes and asked why. Apparently one of his small business clients that provides commercial cleaning services was approached by a company owned by Greenbriar Equity. Huh?
When I got back to my office, I started looking into this. Does Greenbriar actually have a company in facilities management space? Yes. Have they been on an acquisition spree? Yes. Ok, so at least this doesn’t seem to be a complete scam. I called my father again, and he’d been gathering some more information. Apparently it wasn’t just his client that’s been approached, but a bunch of his friends in the area got the call.
Without disclosing too much information, this cleaning business was doing mid-six figures of profit (before owner’s compensation). Greenbriar’s latest fund is $3.5 billion.
The owner didn’t end up selling, but if I had to guess, he was likely going to net low seven-figures. What a success story it’d have been for an immigrant small business owner!
Now, this is an isolated example, but this transfer of wealth is really happening. Private equity investing is getting more and more competitive, and one of the beneficiaries of this stiff competition is smaller business owners (and hopefully many immigrant small business owners who have been overlooked in the past).
A lingering question for me is: are these small business owners, especially immigrant small business owners, ready to take advantage of this phenomenon? What role can I play to help in this transfer of wealth?