Trends Watch: Lower Middle Market Investing

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Gerson Guzman, Co-Founder, Ceiba Capital Partners.

What is your outlook for private equity?

I remain bullish on private equity generally but am most excited about the opportunities in the lower-middle market.  The dynamism of the U.S. economy has always presented a regular stream of investment opportunities for companies that have achieved a certain level of growth and profitability and that are looking to scale with the right capital partner. 

However, I see a unique opportunity at this point in time.  Secular demographic and cultural changes that were already underway prior to the pandemic have been accentuated and accelerated over the last two years.  We’re seeing founders and entrepreneurs earlier in their personal lives being prepared to bring on a partner.  The typical seller was a founder-operator in his 60s-80s that was preparing to or ready to retire and had defined himself entirely around his business.  Now, sellers are younger and ready to bring on a capital partner. They’re recognizing the value of a partner that could bring more than capital; but more importantly it is a mentality shift where the founder-operator does not want to be entirely defined by the business. He, and now increasingly she, has other outside interests and goals and is looking for some of the same work-life balances as the workforce generally.  For a firm like ours, this means we have a larger opportunity set of potential investments where we can bring to bear our skills to grow and scale these businesses and build a team around the founder and incumbent management.

Where do you see the greatest opportunities and why?

Our strategy is premised on two value creation levers. The first is to proactively seek buy-and-build opportunities and the second is to look for those businesses where we can drive equity value creation by leveraging our established playbook and strategic understanding of technology and digital adaptation.  We developed this strategy not only because of our past successes, but because we believe tremendous potential exists to identify and build market-leading companies utilizing this approach, in particular within our target sectors. 

What are the greatest challenges and why?

I’ll break this down into our greatest external and internal challenges.  Externally, no different than any other private equity firm as we face an increasingly competitive environment for investment opportunities.  We have embraced this challenge by developing sourcing tools and approaches specifically targeting intermediaries we believe can provide us with actionable investment prospects and practicing what we preach by leveraging technology across our entire operations from sourcing to execution.

Internally, and I hate to have this sound like a response to an interview question – but we are challenged by our ability to timely screen, review, and execute on opportunities.  We are a small and nimble team, but ultimately, at any point in time, an individual can only successfully focus on a few things (as great a multi-tasker as you may consider yourself).  This means we continuously strive to figure out ways to make quick decisions and focus on those opportunities that have both the greatest impact as well as the highest likelihood of success.  In fact, we have been deliberate – almost maniacal – about establishing and refining our processes to do so.

What keeps you up at night?

Having recently joined the ranks of the entrepreneurial class:  I am most concerned about making the decisions we are making early on to put in place a solid foundation on which we can build a firm that endures.  I’ve been fortunate to meet so many successful entrepreneurs and asset managers over the last two decades and the recurring theme is that those that have been successful are the ones who have built a firm, not just delivered a single product or invested a single fund.  This has involved building an organization with a winning culture of success.  While there are plenty of concerns in starting your own shop, the one that regularly ‘keeps me up’ is the question “Are we doing the right thing to build the firm?”

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.