Lower borrowing costs, more aggressive lending and excess cash continue to prolong the elevated valuations of middle- and lower-middle-market companies. The sustained higher prices have created a fiercely competitive buying market and upset the balance between acceptable risk and return. As a result, many investors still find themselves sidelined—unable to justify returns necessary for the risk profile.
But for investors willing to look beyond multiples to a business’s underlying profitability drivers for value, there is a way to navigate the competitive landscape and compensate for higher valuations at an acceptable risk. The way forward is to leverage “little data,” which can reduce the uncertainty of future financial performance through better understanding of a company’s profit-mix dynamics.