Home / Private Equity / Plying the lower-mid PE market for ‘hidden gems’ with Fortitude’s Nick Miller

The phenomenal growth of private equity's big players has left a yawning gap in the lower-mid market, which enterprising players like Fortitude Investment Partners are all-too keen to step in to and take advantage of.

Almost lost in the hubbub associated with the rise of private debt has been the consistent rise of the private equity sector in the last decade. What makes that growth so robust is that it hasn’t been a single-faceted surge from the top end of town that’s buoyed the sector, but success at the top, middle and lower tiers of private equity that’s fuelled its success.

Fortitude Investment Partners is one of those groups thriving at the lower-mid end of the private equity pile, with founding partner Nick Miller appearing on The Inside Adviser‘s Brilliant Investment Thinkers podcast to explain the low-mid market private equity opportunity set.

As the large private equity funds have grown over the last decade, Miller explained, the tranches of capital they deploy have gotten bigger and bigger. The same could be said of institutional investors like superannuation funds, who are also consolidating and expanding.

“If you think about the mega funds, the $3 billion plus funds, they’re looking to deploy $500 million cheques, and then you got the mid-market, which is looking to deploy $100 million to $300 million cheques each deal,” Miller explained. “And then you’ve got the lower-mid market, which is looking to deploy $20 million to $70 million dollar cheques. And for us, we’re playing in that $20 million to $50 million dollar size range, and there’s just a huge number of opportunities because there’s not many managers looking to chase after it.”

The increase in mean investment has led to a significant reshaping of the private equity market in Australia, Miller continued. As the bigger players have moved up the spectrum, the gap in the lower to mid market has only gotten more attractive.

“What that has done, particularly for us at Fortitude, is it’s provided a little bit of a gap in the market whereby we feel we can put investment behind businesses that need $10 million to $50 million worth of capital,” Miller said. “You’re giving yourself a really strong advantage in which to find high-quality businesses – we call them hidden gems – that represent a much large opportunity today.”

Fortitude typically invests at least “30 to 40 per cent” in businesses that it believes are undervalued and/or it can bring value to. “We wouldn’t generally go below that because there’s certain decision-making rights that we need as an investor,” he says.

Those rights are linked to what Miller explains is Fortitude’s network of “operating partners”, who it often brings in to sit on the boards of investee companies in the sectors it like to invest in, which include technology, the energy transition and food manufacturing businesses. “We’ve got about 160 people that we can call on at any particular point in time to get a view on a business or sector,” he said.

“And that does a couple of things. One, is it allows us to get up to speed from a due diligence perspective pretty quickly,” he explained. “The second part of that is they often transition into board roles within our portfolio company, or sometimes executive roles as well, and they help on the execution of a growth plan. When we’re looking at an opportunity or a business, we’ll certainly try and find the key people in the room, the key people who will know that market better than anyone else, and will stress test the investment and then work with them, as well as the management team of the business that we’re investing in, to build up a growth plan.

“Then we’ll look to execute on that over the next three to five years,” Miller continued. “So it gives you something that I like to call “stacking the deck in your favor,” in terms of putting high-quality expertise people in behind high-quality businesses, to go and execute on a very focused growth plan.”