Private Equity for the Everyday Investor
Small businesses drive the US economy. There are 33.2 million small businesses in the U.S., making up 99.9% of all businesses in the country. They employ 46% of the entire American workforce and make up 44% of the U.S. GDP. Entrepreneurs make up 88% of the country’s millionaires, and owning a successful small business has often been a pathway to generating wealth. There are a myriad of ways to invest into small and medium-sized businesses (SMBs), such as buying them outright, buying a partial stake, or investing in SMB-focused funds. Despite these options, investing in SMBs is not thought of as a common option for everyday investors.
Investing in SMBs is a different proposition than investing in startups. In startups the eventual profits come from technological differentiation, hypergrowth, and gross margins that can be extraordinarily high, but net margins are a lower priority. Startups need investors to fund the loss-making growth until profit can hopefully one day catch up.
Alternatively, good SMBs are cash-flowing, profitable businesses whose owners generally don’t need investors to fund business operations. Legacy SMB owners usually only start looking to sell shares once succession plans are on the table. Often, these are family businesses where the newer generations do not want to continue the business.
Larger players are starting to catch on. Private equity firms have increasingly been buying plumbing, electrical and HVAC businesses and consolidating them into larger, more profitable operations, called “rollups.” In some cases, firms have bought hundreds of businesses and created billion-dollar service platforms whose scale brings efficiencies in marketing, hiring and managerial strategy, such as Apex Service Partners, a $3.4 billion rollup.
Investing in SMBs has clearly become more attractive to major players recently, but is it viable for individual investors? The options available include buying a SMB outright, buying a minority share of a SMB, and investing in a private equity roll-up or fund. The first option of buying a business outright requires operating it or hiring a third-party operator, while the latter option of investing into private equity is not often available to everyday investors. It is the second option of buying shares of SMBs that is the most accessible to investors.
What should you look for in SMBs?
As opposed to publicly traded companies, it can be significantly more difficult to diligence SMBs. Before investing, it is imperative to get the most accurate picture of the business possible. Here is a list of due diligence topics to look for:
- Business Description
- Target Market
- Competitors
- Historical Financial Statements
- Reason for Selling
- Post-Acquisition Plans
- Exit Strategy
- Operator / Management Team
- Investor Terms & Fees
- Estimated Returns
Why should you invest in SMBs?
The Stanford Business School Search Fund Study looked at 681 search funds that invested in SMBs between 2011-2024 and found that the average IRR was 35.1%, an impressive return. A search fund is a model where a manager raises money from investors to purchase a company and actively operate it. It is essentially what many private equity firms do, and it allows the manager to have better control over the investment outcomes. Often, these operators also have skin in the game via a personal guarantee of the debt.
One reason private equity has been targeting blue-collar businesses is that they have consistently high demand from customers, giving them pricing power, and have proven themselves to be profitable over long periods of time. It is this aspect of SMBs that most sets it apart from investing into startups, which can take years to become profitable. Investing into SMBs offers the opportunity for both cash flow, from daily operations, and appreciation with gains in the overall value of the business.
However, it is a difficult space for everyday investors to break into. It is a full-time job to source opportunities and research them, and many of the best opportunities are only available to those with connections or a successful track record. Purchasing a business often means having to either operate it yourself or find a third-party operator, who needs to be exceptionally competent and trustworthy to entrust your investment to.
Buying even a partial stake in a business can be prohibitively expensive, and most search funds and private equity funds are open either to institutional investors only or require very high minimum investments. Even if an individual investor has the time and money to invest in and operate a business, usually all their eggs end up in that one basket. To truly diversify, you would need stakes in many businesses, which simply has not been accessible for most investors.
Who is CapitalPad?
CapitalPad is a new platform that offers individual accredited investors the ability to build a portfolio of small businesses by allocating into curated SMB acquisitions. When an existing company is being acquired, investing partners are needed to help close the deal. Its founder and CEO, Travis Jamison, started as an entrepreneur and has a long track record of investing in SMBs. He has invested in all manners of SMBs, including dry cleaning companies, HVAC companies, towing companies, kitchen repair companies, and many more. His expertise in starting, growing and exiting small businesses combined with his extensive network in the space makes him the ideal partner for potential investors.
Deal Example
Travis invested in a high-end dry cleaner in South Beach that had been around for years and had a semi-absent owner. It was selling for $4.8M and was doing $1.3M in EBITDA. The new operators raised $500k from investors, put in some themselves, and then did a $4M SBA loan for the rest.
The deal pencils out for investors at a ~35% IRR with a 4x multiple on invested capital. This includes an 8% preferred return, 1x liquidation preference, and an accelerated return of investor capital. CapitalPad targets similar deals that aim to return initial invested capital by the end of year 3.
Why invest with CapitalPad?
CapitalPad simplifies the process of investing in SMBs to remove all of the pain points that individual investors have traditionally had to endure to access the space. Instead of having to spend years making connections to access dealflow, CapitalPad delivers highly vetted opportunities to investors to invest alongside motivated operators. Not only is there a quantity of dealflow that an individual would struggle to gain access to, there is quality, as well. Rather than having to dig in and research deals, CapitalPad does that work for you, making sure only the very best opportunities make it on to their platform. Investors can then browse deals and evaluate which ones best meet their criteria. They target SMB deals with high potential returns, typically around a 30% IRR, and they charge only minimal upfront costs and a 20% carry on profits. Investors can get the returns of the asset class without having to operate it themselves.
With a low minimum of $10,000 per deal, investors can easily diversify their portfolio into many different SMB opportunities, as opposed to writing one large check into a single business. There are also different time horizons available, with short-term “rollup” deals where a number of SMBs are merged together, stabilized and then flipped, to long-term deals that are better for cashflow. This gives different options to investors with different liquidity preferences. Investors get deal-by-deal access so they can decide which opportunities are right for them and when is the best time to invest.
CapitalPad handles all of the upfront paperwork, all of the legal and tax documentation and distributions. They are also the GP in every deal, and have skin in the game alongside their investors, who are also partial owners of the business. But investors don’t have to worry about operating the business or communicating with anyone involved with operating the business. It can be a truly passive income stream.
Passively invest into SMBs
Successful, cash-flowing small businesses have been an attractive asset class for high net worth investors for decades. CapitalPad is leveraging its founders’ and team’s expertise and connections to allow individual investors access to this lucrative asset class that is otherwise mostly inaccessible. Join today!
