The attractions of the small-mid private equity segment
Viswanathan Parameswar
New empirical research from Schroders Capital reveals that small and mid-sized private equity funds have outperformed large funds with greater resilience through economic cycles
Viswanathan Parameswar, Head of Private Equity Investments Asia at Schroders
Eufemiano Fuentes Perez, Data Scientist at Schroders
Verity Howells, Investment Research Manager Private Equity at Schroders
As the private equity market has grown over the past few decades, large funds have attracted an increasingly large share of overall limited partner (LP) capital. Investors have gravitated towards large private equity funds under the assumption that they offer better returns and resilience due to scale and stability.
Our analysis shows that small and mid-sized private equity funds have, in fact, outperformed their large counterparts with more robust and persistent returns through time. Moreover, with the small- and mid-segment contributing the vast majority of opportunities in private equity, we believe investors should not overlook this valuable portion of the market.
Small- and mid-sized funds - favourable fund raising dynamics
We have analysed data from over 64,000 private equity funds and 400,000 deals in buyout, growth, and venture capital from 2000 to 2023 (for the purpose of performance analysis, we have excluded fund vintages beyond 2017, where performance is likely not stable. Single-deal funds and funds of funds excluded. Deals below $1 million are excluded). We classify the small and mid-sized segment as funds under $500 million and $2 billion respectively and deals under $50 million and $200 million respectively. The data presented hereafter encompasses all regions and strategies, unless otherwise stated.
Over the last decade, fund raising by large funds has far outpaced deal flow, resulting in higher competition and thus entry multiples for large deals. Large deal flow has grown at 1.6x, while fund raising from large funds has grown at 14.9x. Small and mid funds, by contrast, have experienced 2.7x growth in annual deal flow over the last decade, while annual fund raising has grown at just 2.4x.
Not only is the pace of fund raising growth much higher in large funds, fund raising levels are already far above the long-term trend, according to the Schroders Capital Fund Raising Indicator (FRI). The FRI is a Schroders Capital proprietary model that shows the areas of the private equity market that are above or below long-term fund raising levels. The long-term trend is based on fund raising levels adjusted for inflation and excludes business cycles. Excessive amounts of capital leads to more competition for deals, higher prices being paid and, ultimately, likely worse returns.
We currently observe that fund raising in European and North American large buyout funds is 100% above the long-term trend compared to only 40% above trend in small and mid buyout funds.
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