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A Surge in Interest for Small to Mid-Market Buyout Funds – May 2014

by Harry Young

  • 27 May 2014
  • PE

A recent study carried out by Preqin revealed evidence of a significant growth in appetite for small to mid-market buyout funds over the course of 2013. Preqin Investor Outlook: Private Equity, H1 2013 found that, of the investors surveyed, 39% viewed small to mid-cap buyouts as an area of the market that presented the best opportunities, with 51% of investors suggesting that they would seek to invest in such vehicles over the year. In contrast, Preqin Investor Outlook: Alternative Assets H1 2014 revealed that a remarkable 66% of investors expressed their opinion that this fund type presents the best opportunities in the market (a rise of 27 percentage points), with a weighty 72% seeking to make small to mid-market buyout investments through 2014. Over the same period, distressed debt and fund of funds vehicles saw reductions of 13 and 9 percentage points respectively in the proportion of respondent LPs declaring them to present the best opportunities in the market. 

Of the 5,299 limited partners that are currently tracked by Preqin’s Investor Intelligence online service, more than half (52%) are known to have a preference for, or have previously invested in, buyout vehicles. Of these LPs, 56% are based in North America, 27% are based in Europe, and the remaining 22% are based in Asia and economies outside of North America and Europe. Furthermore, of those investors with a preference for, or previous exposure to buyout vehicles, 15% are private sector pension funds, 13% are foundations and 11% are public sector pension funds – constituting a fairly even spread across the primary investor types. 

The apparent increase in investor appetite for small to mid-market buyout funds has been reflected by a healthy number of LP fund commitments in the first half of 2014. One example is Nebraska Investment Council which committed $30mn to Resolute Fund III, a mid-market buyout fund focusing on opportunities in the US and China. New Mexico State Investment Council also committed $75mn to European mid-market-focused TDR Capital III, while State of Connecticut Retirement Plans and Trust Funds agreed to commit to GenNx360 Capital Partners, a mid-market buyout fund targeting opportunities in North America. 

It is clear that LP interest in small to mid-market buyout funds has soared from 2013 to 2014, in lieu of decline experienced by other vehicles such as fund of funds and distressed debt. With such a high proportion of Preqin’s surveyed investors seeking to commit to these funds, it would seem this trend is likely to continue through 2014 – a reassuring prospect for fund managers seeking to raise capital for these vehicles in the future.

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