Hamilton Lane underlines opportunity in middle-market co-investment
Hamilton Lane has highlighted a shift towards middle-market co-investment, as GPs seek ways to manage fund exposures while still expanding the their investments.
In a recent blog post, the firm said middle-market deals tend to have greater revenue and EBITDA growth compared to large deals, because this tranche of companies has been less picked over by private equity and tend to be founder or family owned.
The firm said middle-market companies offer more revenue growth opportunities, are nimbler in a challenging market, and tend to be moderately levered versus their larger counterparts.
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“Middle market deals generally exhibit more conservative purchase multiples when compared to mega/large deals, driven by this segment of the market being less intermediated and the general perception that these businesses are riskier,” the firm explained.
Middle-market returns are less reliant on financial engineering and, as such, less sensitive to changes in interest rates.
The firm said the many routes to liquidity in middle-market deals should also be considered by investors. The deals have shorter hold periods due to their ability to grow and generate value faster, and generally have a greater number options to exit.
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The firm urged investors to look for experienced platforms that have the scale, technology and relationships through primary capital to broker such deals.
“We find that middle-market co-investments exist in a target-rich environment where there is enough autonomy and influence for GPs to be selective. We also find that middle-market investments can offer more opportunities for PE ownership at more conservative valuations with better leverage levels,” the firm said.
It added that middle-market co-investments can provide LPs access to fee-efficient and diversified risk-adjusted returns, with a higher percentage of middle-market deals tending to result in outperformance, and protection to the downside. Loss ratios, it said, were similar between the middle-market and larger deals.
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