To capture the return potential of the lower middle market, investors must understand the nuances of the market and have deep networks. These relationships, together with an understanding of the target’s markets, allows investors to access the best-performing companies and an opportunity to generate consistent returns and portfolio performance.
The complexity associated with lower middle market investing, means appropriate diversification and portfolio composition strategies are key risk mitigation tools. Pairing this with a careful target selection approach opens the door to partnering with top-performing PE firms and the potential for alpha generation. SCP creates deal flow diversity, allowing investors to see consistent diversity in their deal flow.
Investing in the lower middle market is a relationship business that requires on-the-ground, local presence in order to achieve the most success. Regardless of geography, the best-performing companies will rarely seek out investors; instead, investors must find them. For this reason, it is essential to develop relationships with firms early in their evolution before others are knocking on their doors. The global market is comprised of a complex network of interconnected but regionally diverse opportunities, the keys to successful investing vary across borders. Investment teams building productive portfolios must understand the culture, “speak the industry language”, meet with managers early and have the perspective of monitoring the investment through multiple cycles.