Supply and Demand determine Prices – we know that. But…

The Supply of deals in large cap segment is limited—generally fewer than 10 large deals a year in Asia. However, in the mid-market segment, there are tens of thousands of deals a year—consistent deal volume annually. More deals means a larger addressable market and more investment opportunities.

The Demand and competition of deals in the large cap space is intense. Many large global GPs, direct LPs, and strategics compete fiercely for the same deals. Every large deal is marketed by investment banks and teasers flood investors’ inbox from Sydney to Toronto. Such global auction process drives up competition and prices. This is great for asset sellers as there is full price discovery. But for buyers, this may result in overpaying as they need to outprice the next buyer to clinch large marquee deals and trophy assets. 

In the mid-market segment, you can often negotiate bilateral deals, creating time and space to achieve conservative pricing, proper due diligence, and customized transaction terms. But for banker led large auctions, entry values are aggressive, due diligence timeline is tight, and terms are seller friendly allocating more risks to buyers.

Asset management is a function of two variables: Governance and Value Creation.

Governance is determined by how much influence and control you have. Mid-market deals are smaller meaning it is easier to buy majority or 100% of a company. You control the board and can truly influence management. You are an active investor. Large deals are mostly minority deals (or joint control with other shareholders) with limited board influence and weak control over management. Your hands are tied and you become a passive investor.

Large cap managers often define Value Creation as financial engineering and deal structuring such as refinancing, dividend recap, and structured derivatives. Mid-market managers define Value Creation as strategic and operational directives that are executed in the portfolio company, such as organic market share growth, building assets via greenfield development, and bolt on acquisitions of synergistic targets.

Ultimately, investments are all about exits and liquidity. 

There are very few buyers for large assets globally. Large cap funds may face liquidity constraints including NAV write-downs due to illiquidity discounts. Continuation vehicles are required to create a new form of liquidity and where NAVs discounts are prevalent. Mid-market deals are more liquid as there are many simply many more buyers. Smaller digestible deal sizes mean buyers are more willing to transact and that leads to more exits and DPI.

Alignment of Interests

Mid-market managers focus on investment returns as a priority as carried interests generate more wealth and economics than management fees. However, large cap managers, some which may be listed, focus on fee income as that’s the primary driver of shareholder returns and wealth creation. Carried interests may take a back seat creating potential misalignment of interest with LPs.

For more information and research on this topic, please contact Seraya at: enquiries@serayapartners.com