Private equity neglecting middle market

Victorian private equity houses are not investing enough resources in middle-market companies, and it is affecting investors' abilities to make good returns, according to several Wingate Group investment managers.

Speaking to Money Management, Wingate head of private equity Steve Lipchin said that based on what they had heard in the industry, private equity companies, particularly in Melbourne, were not investing equity into middle-market companies on the same level as large companies.

“Most of the institutional private equity houses reside in New South Wales, so Melbourne doesn’t have its pro-rata representation in terms of local money, so a lot of money coming into middle-market companies in Victoria is coming from NSW,” Lipchin said.

“Probably the economics of running a private equity manager drive those managers towards managing larger funds. They get bigger management fees for managing larger funds, they have to support large teams, and they generally stand alone,” Lipchin said.

The underinvestment was affecting the ability of investors to get exposure to middle-cap companies, according to the managing director of Wingate’s capital raising division, Capital Solutions, Richard Blumberg.

As private equity managers become more successful investing in middle-market companies they look for bigger companies to invest in, Blumberg added.

Smaller managers were also damaged from the global financial crisis and were finding it difficult to raise capital for another company, Blumberg said.