Suggestions
Peter Lehrman
Chief Executive Officer at Axial
Highlights
It used to be that private equity firms could buy a private business "right", lever it, and not do not much else. And that would often beat the S&P materially.
The 1990s and 2000s were largely like this it seems ...
The path to outperformance in the 2020s is markedly different, and private equity firms are re-designing themselves accordingly:
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Talent sourcing for PortCos is coming in-house in new ways
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Sourcing is coming in house, with both full time BD and operator-led sourcing models
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Portfolio Growth Strategy is coming in-house with specialization
Here to tell you about this is Thomas B., who is refreshingly forthcoming about how SBJ Capital is building their firm differently in the modern PE era.
No generalization is ever perfect, but Private Equity seems to have come a long way from it's "buy cheap, lever up, and cut costs" origins.
Enjoy this latest conversation on the Masters in Small Business M&A pod...
EtA and Search funds (self-funded and traditional) will be consistently rivaling LMM PE funds and strategic buyers as the buyer of choice within 3-5 years.
These acquirer types aren’t acquiring “below the PE radar” businesses anymore. That’s simply an outdated narrative. They are regularly buying $10-$40M lower middle market businesses.
Here are 3 fresh data points that are giving me this glimpse into the future of small business acquisitions and ownership:
Example 1: IT Services MSP serving regulated entities ~$8M revenue in ‘23 $1.9M EBIT in ‘23 ~$9M revenue in ‘24 ~$2.6M EBIT in ‘24
Sold to a searcher (MBA grad on his second lap as a search fund CEO). Sourced via Axial. The search fund outmaneuvered 30+ independent sponsors, 20+ committed capital PE funds, 10+ family offices and 4 strategics on this deal. See image below breaking down buyside demand by buyer type for this acquisition (data source: Axial platform)
Example 2: Retail Health SaaS for patient acquisition ~$8M revenue ~$3M EBIT 90% 3-yr EBIT CAGR
Sold to a traditional search fund for <6X EBIT (mid-career MBA, 1st time CEO). Directly sourced off market.
Example 3: Distributor of Police, Fire, and Ambulance products
$15M+ revenue in ‘22 $2.8M EBITDA in ‘22 $16.4M revenue LTM $3M EBITDA LTM
Sold to a self-funded searcher. Sourced via Axial. Competition on this deal included 15+ individual sponsors, 6 PE funds, 6 family offices, and 2 strategic buyers.
Historically, PE and Strategics maintained a “symbiotic” relationship with EtA and Search. EtA would buy sub-$2M EBITDA businesses, grow them to “LMM PE worthy” status, and then PE/Strategics would take them out. It's not such a black and white dynamic anymore.
Brokers and M&A Advisors need to take this buyer category seriously, and PE and strategics need to continue to advance their differentiation strategies.
EtA is maturing, the number of impressive operator acquirers is increasing, and LP capital is flowing.
More data on closed deals can be found via the link in the comments.


