Unlocking Growth Opportunities in Little-Big Cities | |
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The first quarter’s rapid policy shifts overshadowed the long-awaited momentum in private equity exits. McKinsey noted that for the first time since 2015, sponsor distributions to Limited Partners exceeded capital contributions. An early tally suggests that 2024 may be the third highest on record for private equity distributions. It was certainly unexpected over the last decade to see contributions consistently exceeding distributions due to a confluence of allocation increases, extended hold periods and interest rate increases. In more normal times, mature private equity portfolios' distributions should easily exceed the contributions hurdle, even at median historic return multiples.
Capital also seems to be turning towards sourcing deals in what some may consider secondary and tertiary markets. We have noted specific “Little-Big Cities” that punch above their economic footprint in opportunity but whose attractive private company footprint is underserved by capital providers. We have seen rising deal culmination in Detroit, Salt Lake City, Denver, Jacksonville, Springfield, Austin, Oklahoma City, Cincinnati and Honolulu. Depending on sector focus, many of these cities may seem already well-established hubs. Still, for others looking to establish new relationships and identify new adjacent growth markets, they may present outsized opportunities.
In 2025, amidst another bout of rate and supply chain volatility, we orient Steward’s catalytic partnerships to critical gaps for privately held small businesses across the US, particularly those under $100 million in TEV (Total Enterprise Value). US small businesses often have limited access to capital and can feel isolated from the capital markets. As debt costs remain high, equity capital partnerships remain a vital piece of the puzzle, unlocking growth opportunities where market inefficiencies persist. This quarter, we highlight compelling transaction styles and solutions from our pipeline.
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“We believe that 2025 will mark a new dawn for the private market landscape, with the best opportunities in less crowded areas of the market.”
Franklin Templeton, 2025 Private Markets Outlook
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Positioning to Drive Critical Solutions | |
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Since Steward’s formation, our goal has been to empower sector-specialist private equity founders, those with demonstrated abilities to drive into new markets and implement business growth strategies to align company leadership and employees.
Business Services for Upskilling and Employee Engagement
- Training the next-generation workforce requires certifications and skills relevant to the information age. As young graduates' unemployment rises, specialized training services in healthcare technology, customer engagement software and small business enterprise systems represent an opportunity for upskilling and placement.
- Software platforms designed for specialized workforce coordination, such as those supporting nurses or technicians, reduce local shortages and shorten response times. They can enhance patient or customer connectivity, reducing costs and expanding access.
- Employee ownership programs and private-public partnerships foster workforce ownership engagement and productivity, reducing workforce turnovers and helping to accumulate wealth for dignified retirements.
- AI-assisted valuation and property management systems create efficiency and consistency in institutional transaction life cycles, reducing the risk for operators and asset management teams.
Manufacturing and Materials Management that Improve Physical Security
- Manufactured compounds that aid in soil revegetation in waste-affected and fire-ravaged areas. They serve to moderate landslides and accelerate land fertility restoration to enhance safety in post-disaster recovery.
- Aligned construction and project management tools help facilitate safe workplace environments and support the completion of large-scale new projects such as data centers and power systems.
- Fire-resistant materials for industrial use, buildings, and protective wear designed to prevent fires and safeguard first responders.
- Logistics tools that facilitate the coordination of the increasingly complex local and regional supply chains, provide critical inventory planning analytics.
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Road indentations and strips that are heard and felt by the driver and sensed by the car. These alert drivers to potential collisions and hazards, giving them crucial time to react.
Tools for Health and Vitality
- Medical adherence services provide necessary safeguards to ensure that vulnerable groups, such as elderly patients, have consistent support in their healthcare journey.
- Human vitality leisure and health services that support accessible, community-driven prevention and wellness solutions.
- AI-enhanced scientific collaboration discovery tools help catalog immune responses, poised to address pervasive auto-immune diseases.
- Robotics life science workstations for fragile testing environments can streamline the testing and selection of high-potential treatments.
- Devices and therapies that have the potential to stimulate brain mechanisms and the response to illness are increasingly effective in treating conditions such as substance abuse disorders and anxiety.
- Portable devices, particularly handheld medical scanners, have the potential to expand lifesaving healthcare to remote patients.
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These examples of essential businesses are integral to Steward's program, ensuring our capital is poised for growth in the decades to come. Opportunities emerge in partnership with those who assist in driving extensive sourcing with a sharp lens. Private equity is, at its core, a 100-to-1 business, where we look at 100 opportunities to ultimately invest in one. | |
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How Do You Know You're Ready for a New Challenge?
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Below are three pieces of the puzzle that we believe will offer exceptional opportunities in 2025 to access niche US private businesses underserved by the capital markets.
#1. Keep an Eye on Little-Big Cities. There are pockets of uncommon value beyond the traditional hubs of the Northeast, Texas, and California. A renewed resiliency in local economies—fueled by COVID, near-shoring, and supply chain shifts—has drawn business to a broader number of hubs. With one of the world’s most mobile workforces, many Little-Big Cities have benefitted from decentralizing technology and supply chains and harnessing advancements once confined to major metros. This evolution and rapid tech adoption create what some call “US exceptionalism”—scaling innovation beyond traditional strongholds.
#2 Partner with Dedicated Pools Targeting Newer Managers. Over $15 billion in institutional capital is earmarked to partner with newer and smaller private equity managers. There is a strong alignment between the initial anchor capital investors and institutional capital. These multiple waves of foundational capital create a stable base for the creation of new pools targeting Lower Middle Market opportunities. It is challenging for mature private equity allocators to maintain smaller deal size exposure as compelling re-ups naturally create a drift to larger deal sizes. Finding better entry valuations and outsized growth opportunities in the Lower Middle Market requires a disciplined effort to review new fund offerings, Funds I and II.
#3. Seek Companies with Adjacent Growth Markets
It may seem evident that targeting smaller portfolio companies has many built-in advantages with more pathways for growth. Nothing commands the attention of future capital partners quite so much as successfully scaling to adjacent markets to drive top-line growth. Unlocking new runways to increase value is often found in newer, underserved markets. A sharp focus on companies with clear expansion paths in less trafficked markets often leads to more predictable hold periods and better positioning before exit.
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"The future belongs to those who believe in the beauty of their dreams."
First Lady Eleanor Roosevelt
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Bain. Global Private Equity Report 2025. Through one lens, 2024 can be considered the year of the partial exhale. Interest rates and inflation finally came down. Economic growth in many markets remained stable. In response, deal investment and exit value increased. More dollars should flow from sovereign wealth funds and private wealth. And most important, returns remain strong. We will see if private equity can avoid black swans in 2025 and get firmly back on the growth track.
McKinsey. Global Private Markets Report 2025. For the first time since 2015, sponsors’ distributions to limited partners (LPs) exceeded capital contributions (and were the third highest on record). This increase in distributions arrived at an important time for LPs: In our 2025 proprietary survey of the world’s leading LPs, 2.5 times as many LPs ranked distributions to paid-in capital (DPI) as a “most critical” performance metric, compared with three years ago.
Capricorn Investment Group. GP Stakes in Impact Investing. The Strategic Role of GP Stakes in Developing the Impact Investing Ecosystem.
Johara. Unlearning Hustle. Embracing Flow. Enjoy this inspirational short script that starts with… "Imagine if success came from alignment instead of struggle."
Franklin Templeton. 2025 Private Markets Outlook. A New Dawn. The private equity (PE) and venture capital (VC) playbooks of the past decade, where one could financially engineer a return, are becoming less effective. In today’s environment, we believe investors will be rewarded for partnering with managers who have true value-creation expertise and are concentrated on a narrower set of best-in-class investments with a clear exit plan.
JP Morgan Asset Management. Guide to Alternatives Nov. 2024. Real yields, while still negative, have recovered...due to inflation levels. Global private equity dry powder remains above $3 trillion.
Buyouts Insider and Gen II Fund Services. Emerging Manager Report December 2024. While track record, team composition and investment strategy were the leading factors for success, first-time fund managers still required, on average, eight meetings with potential partners to gain a commitment despite a large portion of those being pre-existing relationships.
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Steward Asset Management uses a strategic partnership approach to building diversified portfolios of primary fund investments. Our aim is to institutionalize anchor investing and capture excess return drivers available in smaller funds. Our lens focuses on next-generation innovation and growth in the Middle Market's healthcare, consumer, industrial, service and technology sectors.
Steward's strategy provides investors with early access to debut funds at an influential moment. Using control-oriented strategies, our capital is a multiplier for large-scale economic growth and progress. Steward's active sourcing identifies exceptional teams with sector capabilities that form a repeatable competitive advantage to win deals and bring value-creation levers to propel companies.
Our consultative partnership approach influences a newer manager's investment process, policies and human capital strategy. Our engagement helps to improve the risk-reward framework with GP stake participation and downside controls.
Headquartered in New York City, Steward is differentiated by a deep pipeline, GP stakes approach, unique assessment tools and extensive relationships within the emerging manager community. The team has an accomplished track record of propelling smaller and newer asset managers.
Disclaimer
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