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 Leo Helmers, Co-Founder, Mereo Capital Partners.

What is your outlook for PE?   

We believe the private equity asset class will continue to outperform other asset classes despite the significant inflows of capital into the industry.  However, the private equity industry has evolved to one of differentiation and specialization.  Industry knowledge and deep operational expertise are required to stand out in a competitive landscape.  To achieve superior returns in this asset class, we believe sponsors need to work with management teams to (i) drive operational improvement to enhance efficiencies and operating margins and (ii) leverage industry knowledge and resources to drive top line growth.                                             

Where do you see the greatest opportunities and why?             

We focus on investing in lower middle-market companies with attractive fundamentals that are undervalued due to a combination of the company’s small size and the existence of operational, management, or financial complexity. We believe that companies that are (i) founder or family-owned, (ii) over-leveraged, (iii) a non-core business unit of a larger entity, or (iv) mismanaged by a small private equity firm present particularly attractive opportunities to drive earnings improvement and value creation.  We seek these opportunities in four industries where we have significant investment experience and are supported by a group of operating advisors: business and industrial services, health care services, industrial technology and aerospace and defense.

What are the greatest challenges you face and why?     

The private equity industry has become very competitive and sourcing proprietary or less competitive opportunities is increasingly difficult.  While we do participate in competitive processes, we have also been successful engaging our network of advisors, partners and colleagues to source proprietary or less competitive deal flow.  We have also invested resources into a direct sourcing initiative using software to reach out to companies in our core industries.   We believe a focus on the lower middle market and founder-owned companies coupled with unique industry and operational insights will allow us to overcome the challenges of a competitive marketplace.

What keeps you up at night?

We are entrusted with the capital of our partners and therefore treat this responsibility very seriously.  There is no single issue or topic that concerns us in the marketplace.  We can’t predict tax rate changes, inflation or deflation, supply-chain issues, or other exogenous events, but we can focus on what we can control and always prepare for the unforeseen.  Mereo comes from the Latin word for “to earn” and we are focused on earning the trust of our investors, partners and management teams every day.

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