North America is the world’s largest and most developed private equity market. eQ’s investment strategy focuses on lower middle market buyout funds, which typically invest in companies with enterprise values of USD 10–250 million. Our target funds are predominantly below USD 1 billion in size.
We believe that the lower middle market offers an attractive opportunity for long-term private equity investing. There are more than 100,000 companies in the US with revenues of USD 10–250 million, yet only a relatively small share of private equity capital is directed towards companies of this size. The market is more fragmented and less efficient than the large-cap segment, entry valuations and debt-levels are typically lower, and value creation is primarily driven by operational improvement and growth.
Manager selection is at the core of the strategy
However, the attractiveness of the lower middle market does not mean that all funds are equally attractive investments. Quite the contrary, return dispersion between managers is significant, making successful manager selection a key part of our strategy. Historically, North American lower middle market buyout funds have generated attractive returns, but the dispersion between the best- and worst-performing managers has been considerable.
This is where our local partner, RCP Advisors, plays a central role in our strategy. We have worked with RCP since 2015 and have together built six investment funds focused on the North American lower middle market with aggregate commitments of USD 1.2 billion. RCP is one of the largest private equity fund investors specializing in this segment in North America and has focused on the market since its inception.
RCP’s long-standing experience, extensive manager network and local presence provide us with access to funds that would otherwise often be difficult for European investors to access. The most sought-after managers do not need to market themselves broadly to investors and their funds are often oversubscribed. Approximately 3/4 of RCP’s more than 230 underlying funds have been oversubscribed. RCP’s position as a long-standing and sought-after investor helps secure access and meaningful allocations also to these funds.
From a broad market to a carefully selected portfolio
RCP tracks thousands of managers and draws on its proprietary database built over several decades to support manager selection. During an investment period, they typically meet with approximately 200 managers, of which only around 7% ultimately make it into the portfolio. The assessment focuses on three key areas: the manager’s team, investment strategy and track record.
Our objective is to build a portfolio of approximately 10–15 carefully selected managers, providing diversification across more than 150 North American small and lower middle market companies. The manager selection combines specialist sector and thematic funds with high-quality generalist managers. The result is a diversified portfolio across sectors, geographies, company sizes and investment vintages.
In our North American strategy, local market knowledge is a key competitive advantage. RCP’s long-standing experience, manager relationships and investment expertise, combined with eQ’s fund structure and investment process, provide Finnish investors with access to some of the most attractive private equity funds in the North American lower middle market.
