Private equity firms are raising larger funds than they have in years. Lower middle-market PE firms too are raising oversubscribed funds, suggesting that M&A confidence, even for smaller deals, is bright and strong.
Diversis Capital Management is one recent example. The technology-focused PE firm has raised its second fund at $675 million that surpassed its target of $500 million, and more than doubled its inaugural fund of $255 million that was raised in 2019. So what is making the lower middle-market attractive?
“What we have seen is a very competitive market for lower middle-market fundraising because so many larger funds are looking to raise bigger funds at a quicker pace than before which has absorbed some of the demand for smaller funds,” Diversis co-founder and managing partner Ron Nayot (pictured left) tells Mergers & Acquisitions. “That being said, funds that have a compelling investment thesis or have shown good performance have been able to raise in this unique environment.”
Diversis is not the only lower middle-market shop that successfully raised a fund in this environment. Falfurrias Capital Partners recently closed its fifth fund at $850 million. The firm raised its fourth fund at $500 million in 2019.
“There are several high performing lower mid-market funds and LPs have realized that investing in this segment can yield great returns due to the market being less efficient and the ability to effectuate greater change at each portfolio company,” adds Diversis managing partner Kevin Ma (pictured right). “There have been several bright investors who have left larger firms to venture out on their own and are determined to create their own mark. So while there might be market volatility, the LPs that focus on this segment and have really vetted out the top performers have exceeded the average benchmark for the general PE market.”
To sum up: there is plenty of room for growth in the lower middle-market.
— Demitri Diakantonis