Episode summary
Why a $19B Allocator Is Betting on Lower Middle Market Buyouts
How I Invest With David Weisburd
· · Hosts: David Weisburd · Guests: Alex Abell
Summary
Alex Abell argues that lower middle market buyouts have a structural edge over large private equity funds because the opportunity set is fragmented, less crowded, and still large enough to support consistent outperformance. He says smaller funds typically get quicker exits, shorter hold times, and more room for value creation, while the bulk of capital is still raised in funds above $1 billion even though those large funds represent less than 10% of the target opportunity set.
He also says access and manager selection are the real reasons many institutional LPs stay in large buyouts. The lower middle market has more than 1,200 managers, so the dispersion of outcomes is wider and career risk is higher if a manager underperforms. Abell emphasizes that the best firms are often local, under the radar, and working on family-owned businesses in secondary and tertiary cities, where operational improvements and add-on acquisitions can drive multiple expansion.
On diligence, Abell says his team leans on pattern recognition, on-site visits, references, and RCP’s 50,000-deal database to identify a manager’s “superpower.” He argues that track record alone is not enough because strategy creep, aggressive marks, and fund benchmarking can distort what really predicts future returns. He also sees value in emerging managers and flexible economics, but says fees and discounts can only reduce risk at the margin, not substitute for performance.
Key takeaways
- Abell says lower middle market funds have beaten larger buyouts in top-quartile returns in 13 of the last 16 vintages, by more than 600 basis points on average.
- He argues that access, not sophistication, keeps many LPs in large buyouts, because the lower middle market has over 1,200 managers and limited capacity for large checks.
- Abell says the median leverage in smaller deals is around three turns of cash flow, versus roughly six turns in the upper market, which helps insulate returns when rates rise.
- He says RCP’s best managers often understate marks and are heavily oversubscribed, so the key diligence question is whether TVPI will turn into DPI.
- He says economic concessions like 10% to 20% fee discounts can help at the margin, but they cannot turn a mediocre manager into a top-quartile one.
Notable quotes
“the smaller part of the market has uh provided the most consistent outperforming returns over 20 and even probably 30 years”
“manager selection right becomes you know really key and important”
“the reality is that the vast majority of capital as you mentioned has still been raised in funds what we'll say is over a billion dollars”
“size is the enemy of return”
“we have an extensive database that has over 50,000 deals in it”
How the episode opens
So, Alex, you're at RCP Advisors, which at 19 billion AUM, and last time we were chatting, you mentioned how LPS are still spending most of their allocation in private equity in the large funds. Why is that wrong?
The simplest reason is that the smaller part of the market has uh provided the most consistent outperforming returns over 20 and even probably 30 years. Not only is it higher returns, they generally have in our sort of lower middle market or small buyout market, shorter duration, so usually quicker to distributions. uh exits are generally either to larger private equity firms or companies that are owned by larger private equity firms or sometimes to independent companies and really less than 2% at least for RCP our exits have been to public markets or IPO right so that significantly reduces hold times and the reality is that the vast majority of capital as you mentioned has still been raised in funds what we'll say is over a billion dollars in fund size we'll use a billion dollars as sort of a demarcation line and while you know the vast vast majority of the capital is being raised in those larger funds it only makes up probably less than 10% of the actual target opportunities and companies that exist out there.
And so that mismatch of capital really leads to some structural advantages for uh the the managers that are operating in the smaller part of the market.
How would you explain that LPs are very sophisticated investors? If lower middle market has been so good for so long, why are people allocating more to buy out versus lower middle market? — Because it's hard. That's the real the main reason, right? So this part of the market has over,200 managers.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- lp allocation large buyouts
- lower middle market outperformance
- manager selection diligence
- private equity return drivers
- fund size fees and alignment
Companies and tickers mentioned
- HPQ
- RCP Advisors
- Hewlett Packard
- AlphaSense
Watch the episode
Watch “Why a $19B Allocator Is Betting on Lower Middle Market Buyouts” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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