Steward Quarterly Highlights - 1st Quarter 2023

By Steward Asset Management - View as Webpage - Institutionalizing Anchor Investing Issue #13

Navigating Middle Market Innovation

Themes This Quarter

High Winds

The precipitous banking crisis that started with a run on Silicon Valley Bank quickly widened to disrupt and delay financial flows. Capital calls were postponed as GPs reviewed banking relationships and restrictive subscription line agreements, while lenders assessed the impact on balance sheets.

In coming quarters, this flash reminder of the need for strong treasury management will persist, as the dislocation tempers the availability of equity and debt for venture and buyout strategies — the higher incidence of deal breakage reflects this constriction. Although bad news permeates faster than good, markets and investors are demonstrating excellent poise in balancing opportunities and risks despite the crisis. Capital providers are facing some of the most favorable terms available in decades. 

Middle Market Update

While Middle Market dependence on banks has declined in the last decade, credit selectivity has not. Following a three-fold growth of private credit strategies, the banking crisis should be somewhat muted as non-bank lenders flex their muscle through tougher terms. Deals culminated are expected to reflect lenders' preference for strong near-term cashflows.

This preference is diverting focus to the Middle Market. As a case study, roughly one-third of the private sector's GDP and employment is generated by the over 200,000 US Middle Market universe of companies. Institutional investors looking to increase exposure through small buyout strategies find both diversification and high-quality niches in this less crowded corner of the private equity universe.

Stepping back just a few weeks before the banking crisis opened fissures in the capital markets, the National Center for the Middle Market summarized 2022:

  • Overall economic confidence levels are rebounding after dipping in 2022 and recent concerns related to supply chains and inflation appear to be abating;
  • Healthcare and manufacturing companies report the greatest need for people, but companies across all industries continue to have unmet human resources requirements;
  • Nearly a quarter of Middle Market companies say that the current size of the workforce remains insufficient for market conditions; they still have significant hiring to do.

Unsurprisingly, more established Middle Market companies are benefiting from the recycling of tech talent spilling out of Silicon Valley. This began well before the recent banking turmoil. Small buyout teams will have an easier time hiring talent as well as outright acquisitions by swooping in to clean up disgruntled investor groups of formerly venture-backed companies, a well-trodden sourcing strategy. 

Three Global Sector Opportunities

The most promising Middle Market opportunities, globally, are often found in society-critical businesses that improve wellness while navigating the tumultuous environmental transformation. Often, strategic acquisitions reflect the Middle Market’s position as the R&D lab for larger corporations that prefer to invest in innovations with customer-market fit.

1. Precision Medicine

The next generation of healthcare discovery, diagnostics, and therapies are commercializing both cell and gene mapping projects, driving advances in precision medicine. Emerging biotech hubs are competing and collaborating to support and accelerate discovery and rich data capture. AI's ability to analyze large datasets is powering the process. Global biotech hubs in the US, Japan, China, Germany, and France are already operational, with many more coming on stream. Middle Market companies such as Seattle-based Curi Bio and Ottawa-based Virica are recent examples of the evolution and analytical power accelerating in medicine. 

2. Environmental Transformation

Post-pandemic businesses thriving today include those participating in the acceleration of the circular economy, reducing toxic chemical build-up, and increasing supply chain efficiency. There is an ever-growing thirst for components management and accredited recycling techniques, from improving inventory management to addressing regulatory changes. Beyond the initial wave of efficient logistics, carbon-reduction, and electrification activities, Middle Market companies such as New York-based E-Waste+ and Connecticut-based TRC Companies are deploying techniques to design the next generation of infrastructure and reduce chemical contamination that is threatening genetic structures and reproduction.

3. Water, Healthcare, and Food Safety Services

Demand for business services that monitor and detect pathogens is surging. This includes integrated services, processes, and business consulting across industrial, retail, medical and food production facilities. Combined, they form a reliable and accurate system for detecting dangerous pathogens such as viruses, bacteria, fungi, and parasites. Explosive regulation covering sterilization and safety ensures that the production of food, pharma, and consumer products meets global standards. This also includes monitoring and reporting on the supply chain for the sources of ingredients and raw materials. Middle Market companies at the core of these initiatives include California-based companies Source Intelligence and Hygiena.

"Right now, the world is on the cusp of countless major breakthroughs, but the funding needed to turn innovative ideas into lifesaving products is plateauing. This is not the time to go backwards."

Hussain Aleaziz

Bill & Melinda Gates Foundation

Overall, the pandemic, venture capital boom, interest rate uncertainty, limited credit availability, and the now banking crisis continue to create a wake of disruption for private equity investors to

navigate. As investors sober up from the go-go venture years, more single bid transactions will prevail. Capital is king in 2023.

In uncertain markets small buyout strategies, with a focus on mature cash-rich Middle Market companies, are in an advantageous position between venture (higher uncertainty) and large buyout (higher reliance on credit). While not immune, the Middle Market has demonstrated resilience and low loss ratios over decades.

Notable Events

This March, PEWIN members joined “A Conversation with Loida Lewis” to discuss her memoir “Why Should Guys Have All the Fun?” Congratulations to Loida Lewis, who in her 80th year, is currently the #1 New Release in Business and Finance on Amazon. At Steward’s office, the Private Equity Women Investor Network enjoyed a first-time, in-person discussion with Loida Lewis about family, women’s business leadership, buyouts and exits in a fun, inspirational event.

SEO is hosting its 14th Annual Alternative Investments Conference, AICON April 6th. This will be one of the largest events for newer GPs to meet with institutional LPs in New York.

The Wharton Private Equity & Venture Capital Alumni Association (WPEVCAA) is hosting its hallmark Alumni Forum and Dinner in New York on April 18th. Steward’s Managing Partner, Sheryl Mejia is sharing insights on the topic, "Insights from Fund Founders: Building a Successful Fund and Investing Today".

What We Are Reading

Chubb & National Center for the Middle Market. An Overview of the Middle Market and Its

Dynamics. Middle Market companies maintained their growth momentum in the second half of

2022. Economic confidence rises, reversing a downtrend since mid-2021.

Stepstone. Fight the Urge to Cut back on Small Buyouts. The institutions that reduce their

allocations to private equity’s small market during turbulent markets treat this tranche of the

buyout market as a luxury good, something that is consumed when the economy is booming.

Instead, we think investors should consider it a staple that ca bolster and diversify their

portfolios regardless of the macroeconomic backdrop. If anything, LPs should lean in.

Cambridge’s Chavon Sutton. A Social & Environmental Equity Investing Framework for

Better Real-World Outcomes. Adopting a more disciplined approach to investing for social and

environmental equity (SEE) can help investors minimize portfolio risk and maximize impact,

even during flagging markets.

Gates Foundation. How Affordable Monoclonal Antibodies can Save More Lives. An

interview with Jacqueline Kirchner, lead researcher for the Gates Foundation in the evolving

areas of Biologics. Many people first heard of monoclonal antibody drugs early in the

COVID-19 pandemic. In 2022, a National Institutes of Health clinical trial found that a single

dose of a certain monoclonal antibody was 88% effective in protecting people in two rural

communities in Mali during a six-month malaria season.

Katie Couric Media. Kinfield’s Nichole Powell shares a real-time recap of a financial

nightmare. Cash is king when you’re working with a small business…A lot of traditional banks

won’t work with you until you’ve been in business for a number of years.

Exchanges at Goldman Sachs. How Employee Ownership Models Can Boost Returns. Pete

Stavros, co-head of Americas Private Equity at KKR, speaks with Alison Mass, chairman of

Goldman Sachs Investment Banking, about his role in implementing broad-based employee

ownership models, his views on the economy and investment landscape, and his efforts to

enhance the financial resilience of the workforce.

New Private Markets. We are living in a materials world. To build infrastructure for the planet

that does exist today we need a change of mindset.

KKR’s Christopher Sheldon. Search for Capital Just Became an All-Out Hunt. We think the

uncertain market backdrop and economic environment will have two effects on private

equity sponsors. First, they will favor acquiring very high-quality companies that seem likely

to perform well immediately. Second, they are likely to be willing to pay a premium in credit

markets for certainty in financing their deals compared to a more uncertain path in public


Jones Lang LaSalle. How to Leverage Infrastructure Bill Funding. The $1.2 trillion

IIJA allows US state and local governments to access infrastructure bill funds and use them to

rebuild U.S. roads, bridges and rails; provide high-speed internet access to all; address the

climate crisis; expand the electric vehicle network and more.

Steward Asset Management is an anchor investor to private equity teams approaching their first institutional launch.  We utilize strategic partnerships to build diversified portfolios of private equity stakes. Our lens focuses on strategies that address innovation and disruption in the healthcare, consumer, industrial and technology sectors in the US Middle Market. 

In the attractive small fund universe, funds under $1 billion, Steward’s anchor partnership unlocks additional return potential through GP participation. Steward serves as a catalyst for founders while providing support and guidance. These features are unique to the Steward program and include a focus on alignment and diversity.

Headquartered in New York City, Steward’s competitive advantages include a deep pipeline of talent, proprietary assessment tools, experience negotiating terms and extensive relationships within the emerging manager investor community. The team has an accomplished track record of deploying capital to smaller and diverse asset managers.