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The art of investing in the lower mid-market

Samantha Pokroy, founder and CEO of Sanari Capital, reveals the secret to unlocking the value trapped in founder-run, owner-managed or family-owned businesses, and reveals what lower mid-market funds can bring to the table that large capital investors cannot.

Research shows that, globally, smaller and mid-sized funds consistently outperform larger funds and deliver higher returns.

Yes, it’s comparatively easy and certainly expedient to throw R1B at a large corporate and create an extra R500M of value, but that’s about finance and it often comes at the expense of returns. Turning R50M into R500M, on the other hand, is an art achieved by bridging the divide between corporate and institutional best practice and unlocking the magic/founder mentality in entrepreneurial businesses.

This is the art to master when investing in the lower mid-market.

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Paradoxically, achieving scale is the single most important thing we do in the lower mid-market. SMEs are celebrated because they have a vital role to play in the economy, but that role is only truly fulfilled when they can compete effectively – and to compete they need to achieve scale.

Investing in the lower mid-market means becoming part of the value creation process. You need to start early if you want to influence the level of return that will be realised when you take the business to market or exit to a trade or financial player – and certainly if you want to maximise outcomes for investors and founders alike.

All too often, companies that have not focused on the elements that make their businesses sustainable, scalable and saleable end up leaving money on the table – and this is usually related to reliance on a key person in the company. Private equity’s role goes beyond capital.

We contribute management and strategic skills to improve success rates and enable the business to scale without prohibitive risk. We help these companies get unstuck. By being part of the value creation process, investors can benefit from the achievement of scale, rather than just participating in less growth when scale has already been unlocked.

Scale means better operating leverage, stronger negotiating power, lower unit costs, greater market presence and profile, and higher calibre skills.

Why are smaller and medium sized companies stuck?  Most don’t have the revenue base to afford top tier management. They tend to carry the people who grew up in the business, people who don’t have the skill level to drive a new scale-up agenda.

This is when our active involvement is necessary, helping to bridge with skills, experience and insight to begin the scale-up process, whilst the company builds capacity to sustain it beyond our involvement. And while the hard financial, accounting and tax skills are important, we set just as much store by corporate strategy, organisational design, psychology and the behavioural sciences.

Scale means better operating leverage, stronger negotiating power, lower unit costs, greater market presence and profile, and higher calibre skills. This may mean driving organic growth initiatives, putting two or more smaller businesses together to create the revenue to afford one good CEO, or putting a skilled jockey in place to implement a buy-and-build strategy. These strategies are a means to driving scale.

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