There are several reasons why private equity firms seek to invest in lower middle-market businesses, classified as those with annual revenue between $5 million and $100 million. For starters, there are a lot of them. Currently, there are over 320,000 companies in this segment, compared to 25,000 companies with annual revenue between $100 million and $500 million and only a few thousand companies with annual revenue over $500 million. This provides an immense universe of businesses from which private equity firms can invest.
There are also many opportunities for value creation. Many lower middle-market business owners are at odds with the perceived risks of disrupting a comfortable lifestyle that a company with substantial cash flow provides them. Further, the incentives to grow their business are often at odds with the risks of investing in growth initiatives. This often provides private equity firms with substantial “low hanging fruit” growth levers that have not yet been pursued.
The lower middle-market is dominated by founder and family-owned businesses, most of which do not survive generational transitions. Approximately 30% of family businesses survive the transition from first to second-generation ownership and only 12% survive the transition to third-generation ownership. In many cases, private equity firms provide an attractive exit opportunity for family-owned businesses seeking the preservation of legacy.
These are just a few of the reasons why Townsend Street Capital seeks to invest in lower middle-market companies. We’d welcome an opportunity to share more about our lower middle-market focus and how we can help your business. For more information, please reach out to Charles Zalud, VP.
Charles Zalud, Vice President