Investors maintain strong interest in mid-market

Probitas Partners’ latest institutional investors survey found that limited partners are still flocking to mid-market funds despite expectations of falling returns.

Limited partners are sharpening their focus on North American and European mid-market private equity for 2017 despite concerns regarding elevated purchase price multiples, according to the recent report by Probitas Partners.

“Limited partners are still very focused on mid-market buyout funds in North America and Europe as that is where they anticipate the best risk-adjusted returns,” said Kelly DePonte, managing director with Probitas. “It is also a market that keeps changing, with new players launching funds and a number of successful managers growing very large and moving out of the pace.”

Mid-market funds represent those seeking between $500 million and $2.5 billion, while small mid-market funds typically seek less than $500 million.

More than three quarters, or 77 percent of respondents, said their firm or clients plan to focus most of their attention in 2017 on investing in US mid-market buyouts, while 56 percent of them plan to focus on US small mid-market buyouts and 54 percent said they will focus on European mid-market buyouts, according to Probitas' Private Equity Institutional Investors Trends for 2017 Survey.

Probitas surveyed 86 people, mostly from pension plans, funds of funds, insurance companies and endowments and foundations. The majority of the respondents were from the US and Canada.

Looking at European respondents only, an overwhelming majority of them, or 79 percent, also plan to focus specifically on the US mid-market, while an equal share of them planning to focus on the European mid-market.

Asian, Middle Eastern and Latin American respondents also picked US and European mid-market buyouts as their top two choices at 62 percent each.

Within US mid-market funds, investors focus on specific investment strategies rather than specific geographies, with a particular interest in funds that drive operational improvements, as 81 percent of respondents find such strategies most appealing, followed by buy-and-build strategies, which 73 percent found most appealing. These trends are consistent with past surveys, according to Probitas.

Interest in sector-focused funds has gone up to 51 percent this year from 37 percent in last year's survey, with healthcare, technology and retail/consumer being the top three industries.

With many North American private equity portfolios already quite mature, investors from the region are more likely to pursue niche strategies to complement their portfolios   and focusing on a specific industry is one way to bring some specialisation into a portfolio, Probitas noted.

Meanwhile, investors continue to worry about the amount of dry powder available, as 64 percent cited “too much money pursuing too few attractive opportunities” as their greatest fear regarding the private equity market in 2017.

The survey went on to show that the private equity market feels it is at the top of the investment cycle (56 percent) and that purchase price multiples in mid-market buyouts are too high and threaten future returns (45 percent).