Value After Hours S06 E18: Ben Claremon on Devonshire Partners' Micro Public-to-Private Equity Strat
May 6, 2024
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Ben Claremon, Partner at Devonshire Partners, discusses challenges and opportunities in the microcap market, strategies for small companies to navigate punches, exploring microcap investing and private equity strategies, fundraising models in private equity, and industry focus on stable industrial companies with pricing power.
Small and microcap companies struggle with a lack of growth capital due to limited large check riders, inhibiting opportunities for acquisitions at intrinsic value.
Institutional disinterest in microcap companies has shifted focus to larger market caps, leading to underperformance and orphaned undervalued firms in the small and microcap universe.
Microcap companies face operational challenges such as poor diversification, capital allocation issues, and management struggles, necessitating strategic investments to unlock growth potential.
Deep dives
Structural Lack of Growth Capital in Small and Microcap Companies
Small and microcap companies face a significant challenge due to the structural lack of growth capital available to them. This issue stems from the limited availability of large check riders in the space, leading to opportunities being missed. For instance, a scenario where a firm could not raise a $200 million fund to acquire shares at a negotiated transaction below intrinsic value highlights the difficulties faced by long-only investors in this arena. This lack of growth capital inhibits companies from compounding and expanding, presenting an ongoing challenge in the small and microcap universe.
Secular Problem in Small and Microcap Universe
The small and microcap space has witnessed a shift where institutional strategies that previously included these companies have gradually moved towards larger market caps due to capacity constraints. The diminishing interest from institutions in microcap companies has created a capital flow disparity, leading to an underperformance in this sector compared to larger indices like the S&P 500. As a result, the institutional investor base in small and microcap has diminished, leaving many companies orphaned and undervalued despite their potential for growth.
Operational Challenges and Capital Allocation in Microcap Companies
Microcap companies often face operational challenges and capital allocation issues that can impede their growth and resilience. The lack of diversification in product lines, customer base, and end markets poses a significant risk, especially during downturns when punches are harder to absorb. Management teams in microcap companies may struggle with strategic thinking and capital allocation, affecting their ability to generate free cash flow and drive growth. Addressing these challenges through strategic investments and governance support can help these companies unlock their potential and navigate the competitive microcap landscape.
Flexibility in Strategy and Approach
The podcast episode delves into the importance of flexibility in investment strategies and approaches, highlighting the advantages of having a flexible mandate. It emphasizes the significance of avoiding constraints that hinder investment opportunities, particularly when considering public versus private assets. The discussion focuses on targeting family offices as investors due to their entrepreneurial nature and openness to investing in the lower end of the market cap spectrum, where value opportunities lie.
Adapting to Microcap Challenges
The episode explores the challenges faced by microcap CEOs in the current market environment, discussing the difficulties in raising capital and navigating operational struggles. It points out the lack of attention from traditional fund managers toward microcaps, leading to a lack of growth opportunities. The conversation highlights the importance of introducing a solution-oriented approach to incentivize management teams for operational and margin improvements, addressing the issues faced by small company executives.
Value: After Hours is a podcast about value investing, Fintwit, and all things finance and investment by investors Tobias Carlisle, and Jake Taylor. See our latest episodes at https://acquirersmultiple.com/podcast
We are live every Tuesday at 1.30pm E / 10.30am P.
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Hi, I'm Tobias Carlisle. I launched The Acquirers Podcast to discuss the process of finding undervalued stocks, deep value investing, hedge funds, activism, buyouts, and special situations.
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Tobias Carlisle is the founder of The Acquirer’s Multiple®, and Acquirers Funds®.
He is best known as the author of the #1 new release in Amazon’s Business and Finance The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market, the Amazon best-sellers Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014) (https://amzn.to/2VwvAGF), Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012) (https://amzn.to/2SDDxrN), and Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors (2016) (https://amzn.to/2SEEjVn). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law.
Prior to founding the forerunner to Acquirers Funds in 2010, Tobias was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions he has advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam.
He is a graduate of the University of Queensland in Australia with degrees in Law (2001) and Business (Management) (1999).
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