In a statement on Monday, Fortitude Investment Partners underscored the substantial opportunity within Australia’s lower mid-market private equity sector, highlighting its significant size and relative under-penetration compared to the mid-market.
The firm revealed that while approximately 70,000 Australian companies fall within the $10 million to $200 million enterprise value range, just over 2,000 companies are valued between $200 million to $500 million in the mid-market.
Additionally, the total expected five-year transaction value for lower mid-market private equity is estimated at $327 billion, more than double the $131 billion projected for the mid-market.
Speaking to InvestorDaily, Nick Miller, a partner at Fortitude, emphasised the appeal of the lower mid-market segment due particularly to its “abundance of investable companies and wide exit windows”.
“There are also far fewer private equity managers competing for deals in this space, based on our analysis we believe the ratio of five-year transaction value to dry power is 218:1 for lower mid-market versus 25:1 in the mid-market,” Miller said.
This allows managers in this segment to secure high-quality deals at significantly more attractive valuations, he added.
Fortitude also sees investing in lower mid-market private equity as a way to generate outsized returns and provide an alternative source of alpha for investor portfolios.
Citing data from Cambridge Associates, Miller highlighted that investments in the $25 million to $50 million range have historically produced IRRs (internal rates of returns) of around 30 per cent.
Despite a challenging investment climate, Fortitude highlighted the continued resilience of the lower mid-market sector in 2024.
The firm maintained a robust deal pipeline, progressing 326 opportunities to early due diligence and advancing $75 million worth of deals to exclusivity.
Notably, Fortitude pointed to the sale of Australian food manufacturer Birch & Waite – known for its fresh mayonnaise, dressings, sauces and desserts – to Quadrant as its “defining achievement of 2024”.
“This transaction generated an impressive return for investors, contributing to Fortitude’s overall portfolio gross IRR of over 30 per cent and over 3x multiple on invested capital, and total net capital returned to investors to $625 million,” the firm said.
According to Miller, amid growing volatility in public markets, private equity offers an appealing option for investors seeking more predictable and stable returns.
“Private equity is a very different proposition to listed markets and one of the key drawbacks is that it is relatively illiquid with a lock-up for typically three to five years,” he said.
“While it’s certainly true that listed markets provide access to similar thematics, there are a few key characteristics of lower mid-market private equity that investors should be aware of.”
These include investment time horizons of three to five years, exposure to niche market themes, and often lower entry valuations.
When asked about sectors to avoid, Miller stated that: “Opportunities can be found across a range of businesses.” These include food and beverage, technology and digitalisation, healthcare and infrastructure/energy transition.
However, he cautioned against investing in sectors driven by “hype cycles”, which can lead to inflated valuations and unsustainable growth.
“The types of sectors we’d typically avoid would be those that are subjected to hype cycles which can lead to unrealistic entry valuations and no demonstrable pathway to building out operational leverage,” Miller said.
“We’d also avoid businesses that are heavily cyclical, don’t have macro tailwinds, a demonstrable competitive advantage for high-quality management teams.”
