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Osceola seeks to make individual investments into lower middle market businesses (typically up to $5 million in EBITDA) to create strategic rollups with an emphasis on services and niche manufacturing. We call this approach Micro Private Equity.
Over the long-term, Osceola believes the Micro Private Equity market presents the greatest return opportunities for patient, disciplined, and experienced investors for several reasons.
By the end of 2017, median entry multiples in buyout deals up to $25 million hovered around 6x EV/EBITDA, roughly half the level of larger deals. The more telling trend is the relative consistency of the sub $25 million-deal multiples which have fluctuated within a small range over the same period in which deal multiples upstream have swelled over 20%.
There are approximately 1.3 million US companies with annual revenue from $1 million to $20 million. For comparison, there are only about 100,000 companies with revenue greater than $20 million. This robust supply of candidate companies solves the supply/demand imbalance and spares Osceola from having to pick through the late inning leftovers of the current economic cycle.
Buying companies in the Micro Private Equity segment often means partnering with operators who knows their businesses intimately but require a partner with robust operational and business development expertise to help capture the company’s full potential. This affords Osceola the opportunity to realize early significant gains from implementing processes and systems to increase efficiencies.
Osceola seeks out add-on acquisitions within highly fragmented industries to leverage natural arbitrage opportunities. The large universe permits Osceola to select the most attractive opportunities when sourcing add-ons and exit multiples of the larger rollup are markedly higher than Micro Private Equity entry multiples.
Due to these unique tailwinds—a significantly larger and untapped pool of candidate companies, entry multiple stability and abundant opportunity for organic growth through operational improvements—Osceola targets IRRs of 25% while many larger funds have ratcheted down IRR targets to the mid-teens.
Acquiring companies in the Micro Private Equity space requires stepping into organizations that often lack necessary infrastructure and processes. To be successful, Osceola must possess deep operational expertise and the ability to take on heavy operational involvement. The principals of Osceola have led over 100 corporate finance transactions ($1B+ in capital) and served as CEO, CFO, or President of over 15 successful organizations in multiple business segments. This extensive experience gives the team a distinct advantage in all facets of the transaction, including sourcing, executing and ultimately exiting with an attractive return.
The buyout market’s evolution over recent years would suggest the stability of multiples in the Micro Private Equity segment simply positions it to be the next bought up by bulge bracket firms bringing multiples in-line with the rest of the market. A closer look reveals significant barriers to entry that will continue to insulate Micro Private Equity and Osceola.
Private equity funds originally offered access to deals too large for the typical investor to participate in individually. Micro Private Equity investing flips that value proposition by offering investors access to a collection of deals too small for the typical investor to source and manage. For this reason, Osceola’s Micro Private Equity rollup investments slot in nicely alongside existing private equity allocations due to their differentiation and lack of cyclicality in entry multiples. As a result, returns are more consistent and tend to outperform the broader private equity market in heated or peak cycle investment vintages.