Steward Quarterly Highlights - 3rd Quarter 2024

By Steward Asset Management - View as Webpage - Institutionalizing Anchor Investing Issue #18

It is our pleasure to share observations from our front-row seat helping investors engage with founders of emerging US private equity firms. The private equity industry is experiencing a mid-life crisis as US monetary policy and deal sizes roil liquidity. From this angle, we have the benefit of observing the combined power of valuation discipline and repeatable playbooks within the portfolio management process. This combination helps teams win deals and propel upside scenarios uncorrelated to the capital markets.

We appreciate your partnership,

The Steward Team

steward@stewardassetmgmt.com

(212) 210 2920

Margin tensions eased this quarter for US small businesses as rates and inflation declined. Furthermore, as campaign rhetoric evolves into legislation in 2025, relief could come in the form of tax breaks. To paraphrase Alan Greenspan’s philosophy, reduced uncertainty is the best basis for valuation improvements as it reduces the risk premium. Rates and policy are on a normalizing path, which can serve to bring much needed valuation and margin stability.

While 2023 Middle Market revenue growth was a strong 12%, so far the first half of 2024 has slowed slightly to 4.6% (half year) with strong divergence between sectors. JP Morgan reports that industrials have led revenue growth at 10.7%, and technology has led earnings growth, while healthcare, consumer and real assets remain mixed, requiring precise sourcing and value-creation plans.

Will Private Equity Emerge from its Mid-life crisis? A precursor to a stronger exit environment is improving IPO conditions. In the first half of 2024, eight PE-backed companies successfully entered the public markets, raising over $12 billion, according to the Wall Street Journal—a marked improvement over the $3 billion across six listings by mid-year in 2023. While still below trend, total IPO volume reached 94 by mid-year 2024, surpassing the previous year but falling short of the 20-year average of 214 per year, as noted by Stout. If outlier years are included, encompassing the financial crisis in 2008-2009 and the SPAC boom in 2020-2021, the 20-year average rises to 254.

Many limited partners are closely scrutinizing fund size and strategy as they navigate this liquidity-challenged landscape. Bottom quartile managers are struggling to attract LPs with some LPs executing secondary sales to open the door for rebalancing to more prudent allocations.



The liquidity of large funds is being tested following 25 years of growth in average fund sizes. Looking back to 2000, Bain Capital's Fund VII became the first fund to raise over $1 billion. Fast forward to 2024, in July alone more than ten funds closed with over $1 billion each. This growth continues to strain the initial playbooks that laid the foundation to elevating private equity to the top performing asset class. 

"There is much more exit activity happening in the mid-market than in the large and mega buyout space. In this environment, more than ever, it is important to build a portfolio of high-quality underlying companies that can deliver the desired cash flow pattern."

Paul Newsome, Unigestion

Head of Investment Solutions, Private Equity



As we navigate this discerning landscape, the traditional avenues of value arbitrage—rooted in financial leverage, deal size, and cost-cutting—are becoming even more constrained, prompting a reevaluation of the work required in the mid to late stages of the economic cycle. 

In this era of more selective growth, there are valuable levers within strategic playbooks that have at their core, sector expertise. Notably, these components can drive growth and efficiency unrelated to the economic cycle.

#1 Customer Value - Product Mix, Placement and Pricing Strategies. Understanding how and why customers perceive excess value provides a foundation for a competitive right to win. However, a competitive advantage is often subject to shifting dynamics and evolving consumer expectations. The ability to mitigate any potential decline enhances the chances of success. Understanding the customer value opportunity is essential for formulating an effective strategy.

Many companies are currently navigating a series of pricing challenges resulting from supply chain disruptions, labor issues, and fluctuating material costs, leading to a third or fourth price adjustment with their customers. In this context, conversations around value differentiation and price sensitivity have taken on renewed importance, underscoring the need for a robust customer engagement strategy.

#2 Team Alignment - Ownership Inclusion. Aligning strong leaders with performance remains a cornerstone of operational success. Linking individual contributions to broader organizational outcomes fosters commitment at various organizational levels, which is crucial for retaining outstanding talent. Maximizing senior leader utilization can be achieved by including rising leaders and loyal contributors within a multi-level approach to profit sharing and ownership participation. By activating the entire workforce around shared objectives, organizational transformations can more easily be achieved.

#3 Unlocking Assets – The Hidden Balance Sheet. Tangible assets, intellectual property, and leasebacks play a pivotal role in the consumer, industrial, fintech, technology, and healthcare sectors, where rapid evolution demands innovative strategies to redefine value propositions. At a time when margin pressures remain a concern, even as rates decline, the right asset strategies can drive significant growth and unlock balance sheets or new avenues of revenue.

#4 Data – Scale & Optimization. Middle-market companies are often in a position to benefit from partners that can add sophisticated data management augmentation to prioritize and benchmark operational improvements. It is not just a focus on short-term profits but constructing an informed lens across the organization to hone decision-making. Sector specialist private equity partners often win deals because of their easy ability to competitively benchmarking customer engagement, input pricing, vendors, delivery systems and R&D efforts. Increased contracting and vendor management sophistication can lead to stability and a better understanding of the ROI of capital expenditures. Competitive long-term contracts and pricing negotiations, with both customers and vendors, are levers to build a platform with better long-term stability and growth.

At the heart of implementing many of these margin-enhancing improvements is data management, the guide map to successful decisions. With market landscapes evolving, optimizing data management is the launch pad for growth and tactical navigation, particularly when integrating add-ons.

Value-added playbooks are only effective when paired with well-targeted sourcing processes that focus on valuation discipline and overall market dynamics, two factors often in tension. Identifying opportunities that align with secular market trends with exceptional growth tailwinds paves a clearer road to successful landings. Combining this insight with discipline to avoid value traps and troubled situations ensures that the playbook remains focused on controllable factors, increasing the likelihood of success.



The widening economic opportunity gap between US small and large business owners is stark.  Private equity partnerships are a catalyst to contribute real value to their portfolio companies to propel the next leg of expansion. The 2024 rotation to smaller, profitable companies, in both the public and private markets, is evidence of the collaboration and deep value opportunities available as the valuation gap closes.  

What We Are Reading

Middle Market Growth. ACG. PE Weekly: IPOs Back on the Table as PE Dealmaking Expected to Climb. September 2024. The latest analysis signals a brighter future ahead for private equity M&A. IPOs are back on the table for a growing number of sponsored companies. 

Private Equity International. Adam Le. Florida’s SBA Bradle: Top Quartile Returns are Not Enough. The $258 billion US pension wants to know whether a GP’s performance was repeatable which comes down to the manager’s expertise. 80% of Florida SBA’s private equity portfolio is allocated to specialist mangers, with the remaining 20 percent exposed to generalists, a reversal from a decade ago.

Best but Never Final. Private Equity Playbook: Mastering Market Dynamics, Business Models, and Team. Lloyd Metz, Partner at ICV Partners, Doug McCormick, Managing Partner of HCI Equity, and Sean Mooney, CEO of BluWave, provide a guidebook to strategies that shape successful investments and drive business innovation. 

Capital Allocators – Inside the Institutional Investment Industry. Training Grounds – Carnegie Corporation of New York. Ellen Shuman, Meredith Jenkins, Kim Lew, and Alisa Mall discuss their paths, and the Carnegie organization and investment process, including recruiting, culture, research, decision-making, and succession.

SBIA. New report from the Institute for Private Capital highlights unique benefits to investors of Small Business Investment Companies. IPC found that SBIC funds outperform comparable non-SBIC peers by an average of 4.13% in terms of internal rate of return (IRR) and by 0.74x higher producing a multiple on invested capital (MOIC) for SBICs of 2.3x.

Duckbucks. We are in the Business of Change – An Interview with Rob Heyvaert. Rob Heyvaert discusses the five sectors that are rapidly evolving due to advances in fintech: wealth management, banking and payments, capital markets, insurance and data.

Hamilton Lane. Update Marathon Style Performance - Chart of the Week. Over the last two and a half years there has been a great divergence in returns between strong public markets and private equity in contrast to the large losses in venture capital.

JP Morgan Asset Management, Tyler Jayroe. A Big Role for Small and Middle Market Private Equity Investments. Structural advantages and current market conditions may help small and mid-size companies make a big impact in private equity markets.

Pensions & Investments. Private Equity Faces a Lost Generation Due to Higher Interest Rates. Comments from Ontario Teachers’ Pension Plan Chief Strategy Officer Jonathan Hausman and Caisse de Depot et Placement du Quebec’s head of private equity, Martin Longchamps said he expects a “significant uptick” in deals globally in the next six to 12 months. Limited partners “want their money back,” he said.

Ropes & Gray. US Private Equity Market Recap – August 2024. July 2024 deal count and deal value increased by 12% and 59% MoM, respectively—a strong start to Q3 and an encouraging sign for dealmaking recovery. Dry powder continues to sit at highs of around $1.2 trillion, but is expected to come down as dealmaking rebounds and investors put capital to work.

Unigestion. Paul Newsome. In Search of DPI. There is much more exit activity happening in the mid-market than in the large and mega buyout space. Secondaries discounts can be attractive but come with a health warning. In this environment, more than ever, it is important to build a portfolio of high-quality underlying companies that can deliver the desired cash flow pattern.



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 diverse asset managers.

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