Why Invest In Lower Middle Market Companies?

• An established and profitable Lower Middle Market (LMM) company ($1.5 million to <$5 million EBITDA) is an attractive asset for long term private investors

• The transaction market for smaller companies prone to inefficiencies for economic and structural reasons

  • Values realized are less than what the sustainable cash generation capacity would suggest (the Small Company Discount or “SCD”)

  • LMMs are much less “financialized” as compared to larger companies: Real Asset vs. Financial Asset

• SCDs are generally persistent over time and through market cycles

• Prime drivers of the SCD are:

  • Lack of access to capital/higher cost of capital (relative scarcity of institutional capital)

  • Uncertainty of secondary liquidity

  • Information/reporting deficiencies

  • Management depth & succession risk

  • Higher small company mortality rates

• Retaining the value in a successful small business over the long term is economically superior to selling and reinvesting the after-tax proceeds

• Cash generative moderate growth small companies can be viewed as either “Growth Annuities” or platforms to scale up organically of via acquisition

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