Chris Brookman
Private equity investors are missing out on a reliable growth opportunity by overlooking a vast, undervalued corner of the market – Australia’s lower mid-market segment, according to Fortitude Investment Partners.
“With an abundant opportunity set, less competition for deals, lower entry prices, wide exit windows and the potential for higher exit prices, the lower mid-market private sector is booming with more than 68,000 domestic companies ready for scalable growth and value-driven exits,” notes Chris Brookman, chief commercial officer, Fortitude.
With further rate cuts on the horizon, potentially pushing more capital into riskier listed assets, Brookman says private lower mid-market offers a rare balance of stability and value. Backed by a vast and under-crowded opportunity set, he believes now is the time for investors to look beyond the obvious.
“Wholesale investors are probably already familiar with opportunities that offer exposure to mid and large-cap private companies. Investors may be less familiar with the lower mid-market, however and this is the segment of the market that Fortitude focusses on exclusively,” he added.
The lower mid-market includes companies with an enterprise value (EV) under $200m and would be considered ‘microcaps’ if listed on the ASX. (In fact, any listed company under $300m EV is typically considered a ‘microcap’.) Out of 2,059 companies listed on the ASX, about 1,470 fall into this category.
But in private markets the opportunity set is much larger. According to the Australian Bureau of Statistics, there are more than 68,000 private companies in the lower mid-market. This compares to an opportunity set in the mid-market (EVs between $200m and $500m) of 2,208 and the large cap market (EVs over $500m) of 1,725.
“Moreover, while many private equity firms begin their life in the lower mid-market, over time many will gravitate towards the mid-market and large-cap market as they raise more capital and will need to deploy into ever larger transactions. This means that competition for deals is fierce, as is the pressure to deploy.
“Ultimately this means that the ratio of 5-year transaction value to PE dry powder in the mid-market is 25:1 versus 218:1 in the lower mid-market,” Brookman says.
This imbalance delivers a clear pricing advantage. “At Fortitude we typically pay an average EBITDA discount of 30–50% versus the mid-market and large-cap market. As investee companies mature and move into the mid-market, the average price multiple will increase because of the increased competitions for deals at this tier of the market. This is called ‘multiple expansion’ and is one of the many levers that Fortitude uses to generate returns for investors,” Brookman says.
“Quality companies at this stage are also easier to scale. They have typically carved out a market niche which provides a meaningful pathway for expansion through both organic and inorganic growth. This means the potential to add value over time can be significant.
“And when the time comes to exit a company there is typically a broad range of buyers available. This might include other private equity firms, who focus on mid-market or large cap or it may be corporates, who typically have more discretion to make strategic acquisitions at the $200m – $500m range.”
Brookman says the case for the segment is clear. “The lower mid-market offers an expansive opportunity set, the ability to add value, expand multiples and ultimately find buyers.”
