Over the past decade, the private equity market has quietly shifted the playing field for business owners, investors, and asset allocators alike. I’ve seen this firsthand — not just as an investor, but as a former business owner who had to decide whom to sell to.
Writes Gregg S. Fisher, founder and portfolio manager at Quent Capital.
Ten years ago, when I sold a part of my asset management business, the public markets were offering higher valuations on average than private buyers. Within just a few years, that flipped. Today, private equity buyers — even those backed by public capital — routinely pay more for businesses than strategic public-company buyers.
Why? Cheap money and lack of public scrutiny
When you can borrow at 1–2% — or raise equity capital at sky-high multiples — your cost of capital is close to zero. That means you can pay a premium for acquisitions and still pencil out an “acceptable” return. As a seller, that’s fantastic news. As a buyer? Not so much.
This dynamic has fueled fierce bidding wars. Whether you’re selling a niche software company, a healthcare services business, or an asset manager, you might have 75 private equity funds, dozens of public companies, and maybe even your grandmother competing for the deal — driving valuations to levels that don’t leave much on the table for the eventual owners.
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The “winners” of this bidding war are actually losers, as in any winner’s curse situation – whoever gets the company has almost certainly overpaid for it, locking in a subpar return.
Some argue this trend is “killing” small-cap indexes because promising companies are acquired before they ever enter the index. There’s some truth to that, but it’s not my main takeaway.
The more important point is that for investors in small companies, this private equity appetite creates real opportunity. Here’s why: Historically, an investor in a sleepy small-cap stock might wait five years to see a 40%-50% return (or of course they could lose just as much while waiting), as the company hopefully slowly grew into its valuation. Today, a private equity buyer can come along and deliver that gain overnight in the form of a buyout premium.
For a portfolio manager who is adept at identifying quality businesses before they’re on private equity’s radar, those returns could potentially be realized much faster.
Forced liquidity events
Of course, small-cap portfolio managers must be on guard against the possibility that the public-market price already includes the premium, since it is possible that the markets know that small companies are PE targets and that PE pays high prices. Such a buyout is a kind of “forced liquidity event” that rewards selectivity and patience — two things index funds probably can’t replicate given the way they are constructed.
There’s another wrinkle. Many private equity (PE) investors have been paying these premiums in an environment where exit opportunities are uncertain. IPO markets have been largely shut, valuations in public markets for similar businesses have fallen, and liquidity is scarce.
The Stefanik Effect
One reason for this shutdown is the criticism on Harvard’s valuation practices by U.S. Congresswoman Elise Stefanik, who described private equity funds as “often overvalued due to reliance on internal estimates and outdated transaction data,” as reported in a Wall Street Journal article. “The real, realizable value of these assets,” she continued, “is likely far below stated values.” This is “because of higher interest rates and declining private-market valuations,” the Journal explained.
Following Stefanik’s logic, when PE eventually tries to sell these assets, it’s likely to be at discounts far below the purchase price — creating potential future opportunities for investors to buy back these businesses at a fraction of what PE paid.
For investors, the lesson is clear: the current PE buying spree is not just a private markets story. It’s reshaping the attractiveness of small companies — and creating an environment where disciplined portfolio managers (and investors) can capture significant value.
So, thank you, private equity. Keep raising capital. Keep paying premiums. For those of us investing thoughtfully in the small end of the markets, you’re providing both an exit strategy — and a source of tomorrow’s bargains.
