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Why a generational shift in private business ownership creates unique opportunities for PE investors
Key Takeaways
- Private equity is a huge industry with $3T in assets, but the smaller end of the market is more inefficient, which may offer greater return upside.
- Value creation in private equity relies on leveraging operations, sourcing, and/or structuring, and operations offer the most value creation potential.
- There are some interesting opportunities emerging as many company founders age without succession plans, potentially offering immediate value with lower risk.
Transcript
My name is Matt Morris. I'm the managing member of Hampton River Partners and the managing member of Dry Land Partners LLC and based here in Austin, Texas.
The private equity industry as a whole has exploded. You have 3 trillion in assets across private equity, venture, and infrastructure. It's a really big industry right now, and it wasn't as big 30 years ago when, you know, the Yale investing model was sort of birthed, and people really didn't know as much about the space.
It's now pretty efficient now at the high end. Most deals are pretty widely marketed. Everything's pretty darn efficient. The ability to really create value at the mega-cap private equity range, in my opinion, is very limited, except for in operations, sourcing, and structuring. The primary components are creating value, and private equity are leverage operations, sourcing, and structuring the leverage as a commodity. Sourcing is harder to do at the high end of the private equity market. It's much more efficient. So there's not as much of an edge there. Structuring is also a skill, and if you can do that intelligently at the smaller end of the market, you can create a lot of value.
And operations, I think, is where you can create a lot of value, both at the high end of the private equity market and at the lower end. So, in my opinion, where the best opportunities are in private equity, if you're a family that hasn't really invested in private equity, are at the smaller end of the market because there are so many more companies for sale, the markets are more inefficient, and there's much more opportunity for outsized returns. Whereas the high end of the market, it's pretty much-levered beta, where I find a lot of opportunity.
When I was starting out as an allocator was in small market buyouts and then just small-cap private equity in general, both in the US and Europe and a little bit in Japan. Now. The main driver of that is demographics. In the US, you have, you know, I think 8000 people turning 65 every day, a lot of those are private business owners. Many of them don't have succession plans. So the opportunity to buy what amounts to, I think, 7.3 million private businesses owned by boomers is pretty, pretty remarkable. And markets like Japan. The average age of business owners there is 69 or 70 years old, and 50% of the businesses shutting down every year are profitable, and they're shutting down because they don't have a succession plan in place.
So, private equity is a real opportunity in markets like that, where you have aging populations and not a lot of people willing to take these businesses over and run them so that the small under the private equity market, I think you can generate market returns for taking much less risk just given the fact that there's going to be a huge generational shift in owners selling assets due to aging.
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