What is the future for the mid-market funds in a new private equity world of super-sized funds and boutiques?

This was a question asked at the recent SuperInvestor conference in Paris. With the industry obviously moving towards larger more global funds there was a sense that some mid-market firms, unless careful to position themselves could become lost in the ether. A new term has even been coined and is apparently widely recognized in the industry, ‘JAMBOG’ – just another mid-market buy-out group.

Just as GPs are under increasing pressure to deploy capital so are LPs, and with many institutions undermanned it has become increasingly difficult for LPs to find the time to build up relationships. In many cases LPs are selling some of their stakes in funds into the secondary market in a bid to scale down the number of relationships they are managing.

Ideally they want to be able to deploy as much money as possible into a small handful of high performing mega funds. They are not interested in small generalist funds. However mid-market GPs had differing reactions to this new threat from above.

Speaking at the conference Louis Elson at European mid-market firm Palamon Capital Partners said: “We are still a cottage industry and the money is now flowing into the more professionalized areas of the market. Many of theses big funds used to be mid-market players now our firms need to become more professionalized I don’t think that there is that much liquidity in the market”.

However others disagreed. Dominique Peninon at fund of fund Access Capital Partners, argued: “It is not more difficult to raise money for the mid-markets, as a fund of fund we turn down 95% of the opportunities which come to us and within a year we see that they have been funded elsewhere”.

He argues that with 200,000 companies in Europe in the €10m-€400m bracket and only 300 mid-market buyouts done last year there is plenty of opportunity for mid-market players.

James Harrison, Towerbrook Capital Partners, agreed: “We still have the ability to create an unfair advantage in the sale process. Our knowledge of the industry and of management teams and the charisma we have to influence people means we have a higher chance than in a fast paced auction process to create advantages for ourselves.”

However some did argue that the mid-market had to differentiate itself from the top end by focussing on multiples rather than IIRs.

“The big funds look at high IIRs and not attractive multiples. Our part of the market is not a commodity we are all about getting buyers and sellers together”, said Philip Buscombe at Lyceum Capital.

Peninon agreed: “It is easier to invest €200-€300m into larger funds than to make a selection from 400 mid-market funds. Players have to be driven by cash multiples nit IIRs to differentiate themselves. Financial engineering is just a commodity holding times in the mid-markets need to go up so that firms can really add value to their businesses. You have to sacrifice IRR for multiples”.