Small-cap leveraged buyout funds are more profitable than funds focused on acquiring larger targets, according to a report released in June from alternative investment technology provider eFront. The research examined U.S. leveraged buyout funds with vintage years up to 2009, which are fully or largely realized. In a June 24 article published by S&P Global Market Intelligence titled “US small cap buyout funds outperform mega vehicles, study finds,” asset management partner Peter Laybourn discusses how the findings were broadly in line with what he has seen in the market.
The article discussed how investors such as pension plans, which may not have an outsized planned allocation to private equity, may elect to spread their allocations in a bid for diversification and to potentially boost their returns. "If you have one or two home runs in a smaller fund, that can have very meaningful impact on the overall return profile for the fund," Mr. Laybourn said. "Some of the earlier venture capital funds on Facebook [are] getting 100x their return, but that just doesn't happen in the larger funds." He also remarked that an allocation to a small-cap manager “simply isn’t practical” for some investors with large pools of capital that they need to deploy and invest. He added that the amount some investors want to commit in a single vehicle could make up half the size of a small-cap fund, and some investors have limitations on how much of the fund their commitment equates to. Larger investors could get access to small-cap funds via commitments to fund-of-funds that actively seek out new private equity managers with promising return prospects.
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