Perspective: Insights on the Private Equity Market
At Trident, we believe that small business private equity represents the best investment opportunity within the alternative investing universe today.
Why Small Businesses?
First, as an asset class, they have been relatively ignored by large institutional investors and limited partners. Instead, these companies are found, purchased, grown, and exited with backing from smaller syndicates of retail-like investors such as family offices and high net worth individuals. As a primary tenet of institutional asset management, if you can bring disciplined analysis, rigorous processes, and experienced investment acumen to a field dominated primarily by non-professional investors, you will have a higher rate of success winning and attaining the best opportunities (best assets) in that field. At Trident, we believe that inefficient markets dominated by retail investors are a major opportunity. From our perspective, we are hard-pressed to find a more inefficient market in the alternative investing space than small business private equity.
We define small businesses as companies making between $10MM and $100MM in annual revenues. Businesses of this size tend to be difficult for large institutional investors and private equity firms to economically analyze. The typical institutional investment business model, overhead, and manual processes make it difficult to profitably scale the analysis of opportunities for equity check sizes that are usually only between $5-$30MM. The result? Trident can purchase businesses for cheaper prices than its asset management competitors.
Second, the segment of small businesses that Trident targets are high quality and have proven that they need to exist by weathering multiple economic cycles. Not every small business opportunity is attractive, but when we find tenured, quality companies with true staying power, we take a serious look. An integral part of finding quality small businesses is management. An institutionalized management team, strong financial backing, and a scalable platform often leads to attractive competitive dynamics for small businesses. This is why Trident works with Independent Sponsors that we require to have some niche operating or sector expertise that gives them an unfair advantage in executing and growing our investments.
Third, as small businesses grow and scale, attractive exit opportunities present themselves. It is not broadly recognized, but there is roughly $2.5 trillion of uninvested cash (or “dry powder”) sitting in the coffers of US-based private equity funds.¹ This dry powder presents a very real risk for these funds as it means that deploying capital into attractive investments is harder and deploying capital into riskier investments is more likely. Only a small percentage of these funds would consider investing directly in small businesses due to the size constraints described above. They are, however, aggressive buyers of strong, growing businesses that are at the scale and caliber that Trident expects our portfolio companies to have reached after 3 to 5 years. In effect, Trident has turned the risk borne by most private equity investors into a fairly attractive opportunity for our investors. We buy strong but small businesses for low multiples due to a lack of ‘would-be’ competition and then sell larger, more professionalized, and better capitalized businesses to that same ‘would-be’ competition set a few years later, usually at higher multiples. This allows us to target higher than average gross MOICs and deliver significant returns to our investors whether we sell to a financial buyer or strategic.
We are a group of investors and former operators who have deep ties to the small business community and with decades of professional experience in the sector. We are sons and daughters of the upstarts, entrepreneurs, and operators who help America thrive year in and year out. We deeply believe in the sector and for this reason decided to build a business exclusively dedicated to its growth. To create the necessary scalability, we have invested in technology unlike any other private equity firm.
We believe that owning a good business through the combination of a top-tier operator and an attractive price will result in very attractive risk adjusted returns. In light of recent economic upheaval due to the COVID-19 crisis, we think this opportunity set is more attractive than ever.
There are three primary reasons why now is a better time than ever to invest in small businesses:
First, we are in a recession which is an environment that historically has offered lower acquisition multiples, as well as a lower probability of another large pullback within the next 5 to 7 years. Said another way, we’re at a trough economically, which is a good time to put money to work and buy solid assets.²
Second, COVID-19 is an opportunity for leading small businesses to acquire market share as things normalize. Unfortunately, many companies, if they have not already, will be forced into bankruptcy as the slowdown continues to trickle through society. This allows local market leaders to take share in what is one of the most uncertain and challenging economic environments experienced since the Global Financial Crisis.
Third, given the uncertainty of how long this recession will last, a portion of owner-operators of small businesses are more likely to seek a generational sale now rather than waiting for things to normalize over the coming volatile year.
It is clear to us that the United States is going through one of the more trying economic times in our Nation’s history. Trident was founded and built on the belief that small business is the most attractive asset class within alternative investing. At our core, we want to support the American Dream by investing capital into the businesses that make up the backbone of the American economy. Today, more than ever, is an ideal time to invest in this asset class and reap outsized rewards.
Opportunity for Investors in Private Equity
Past performance can never be used to imply future outcomes, but we believe that we are seeing a unique opportunity ahead of us.
² Cambridge Associates, US Private Equity Index and Selected Benchmark Statistics, Q1 2019.
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