Serve believes the lower middle-market represents an extremely large and growing opportunity set for talented private equity managers to pursue. It has been estimated that over 90% of all businesses in the United States are considered small businesses. Many of these small businesses are owned by non-institutional investors, such as founding entrepreneurs, that are over the age of 50 and are beginning to contemplate a near-term change of ownership. Serve believes this provides an attractive backdrop for lower middle-market private equity investing in the coming years.
Serve focuses largely on lower middle-market control buyout and growth equity managers with fund sizes less than $1 billion and most often less than $500 million. Over the long term, the performance of private equity funds focused on smaller companies has exceeded the performance of larger private equity funds. Serve believes smaller funds have been able to generate attractive returns due to there being more opportunities to implement growth strategies and operating improvements within smaller companies. In addition, Serve believes the potential for higher returns exists due to less competition among capital providers in this space, which can result in lower purchase price multiples and an increased likelihood of multiple expansion upon exit.
Serve focuses on managers that execute niche strategies within the lower middle-market including funds focused on a specific sector and/or geography, spin-out managers, managers with a unique operational approach, etc. In addition, Serve has a preference for managers who provide co-investment opportunities on advantaged economic terms to help further enhance returns for investors.
During his time at UTIMCO, Scott committed to 20 lower middle-market funds and has deep relationships with many access-constrained managers in the space. Some examples include a mix of established managers (Wingate Partners, American Industrial Partners, H.I.G. Capital, Cortec Group); spin-out managers (Union Park Capital, Carrick Capital, LFM Capital); and managers with a differentiated model, often through a focus on a specific sector, geography, etc. (Alpine Investors, LNK Partners, MSouth Equity Partners, Teakwood Capital).