Revisting the barbell theory

It’s been a few years since people talked about the barbell theory and perhaps in that time LP commitments to the middle market have gotten a little pudgy. But are LPs hitting the weights again?

A few placement agents and a buyout fund manager talked about the barbell effect in the first quarter. The barbell theory refers to the way private equity investors tend to favor smaller and larger funds, but not much in the middle. The barbell range at the small end refers to funds smaller than $500 million, and at the top end $3 billion or so.

Shaun McGruder, a principal at Palm Beach Capital, which has raised $105 million of its $150 million target for its second fund, says being small has its advantages. Although some potential LPs have turned the firm down because it wants to up its investment in future funds, other LPs like the story.

“We’re playing where big funds don’t want to play,” he said, buying companies in the $2 million to $6 million range.

“A lot of LPs are adopting the barbell strategy. It’s really the middle that’s being squeezed,” says Chris Caputo, MD at placement agent Fortress Group.

“We’ve seen quite a few mid-market buyout funds that just don’t look that differentiated. Given the number of them and the amount of dollars chasing deals, it might be a tough place to make money,” he said.