Steward Quarterly Highlights - 4th Quarter 2024

By Steward Asset Management - View as Webpage - Institutionalizing Anchor Investing Issue #19

Happy Holidays! It is our pleasure to share observations from our front-row seat bridging access to founders of emerging US private equity firms.



Looking into 2025, we have the benefit of viewing the combined valuation discipline and repeatable playbooks in newer and smaller fund managers. Our focus on providing excess returns with deeper GP stake partnerships helps us propel upside scenarios less correlated to the capital markets.

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The Steward Team

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A friendlier tax and regulatory environment is expected to have an outsized benefit for small enterprises. FactSet estimates smaller company earnings have the most significant leverage such that each 1% tax decrease will create 1.2% or greater earnings growth.

Tech-enabling diffusion continues to accelerate US small businesses with the help of growth capital from private equity partners. This is widening the US competitive advantage, creating an era of exceptionalism, as the US accounts for 70% of software spending worldwide.

Private equity fund formation is expected to increase as the GP stakes landscape for emerging managers enters a fourth year of institutionalization. Over this same period, mega private equity managers have underperformed their smaller counterparts, accelerating spinouts.

The dynamics of recent years have favored companies capable of making quicker pivots and those with more opportunities to generate growth. The substantial outperformance of US smaller private equity strategies over their larger counterparts is shown in the graph below. The tepid exit market for mega PE firms has muted realizations, with the mixed IPO performance exacerbating the overhang.



Middle-market firms' lower reliance on leverage to generate returns has allowed smaller buyouts to be more resistant to the rising cost of debt. Smaller company valuations accelerate as their growth takes them into the desired $50 to $100 million enterprise value range when financial and strategic buyers' appetites increase. It is in this valuation segment that buyer demand increases for strategic add-ons and for larger PE firms to average down multiples while waiting for exits. 

"Top-quartile, middle-market managers, however, have historically posted stronger returns than their peers in the mega/large space. While top-quartile returns are high, the dispersion of returns for middle-market buyout also remains wide, showing the upside potential and downside risk."

Fund Size ≠ Average Returns, Hamilton Lane's Chart of the Week

Private Equity Returns by Fund Size

Since the Fed Rate Hikes Began

Source: FS Investments, PitchBook as of March 2024, latest data available

Seeing Around Corners – What is in Store in 2025

Even though Middle Market companies appear to be ripe for continued growth, the fundraising landscape for small buyout emerging managers remains challenging. Fewer than 1% of institutional investors have the staffing and experience to perform the heightened due diligence required to vet early-stage emerging managers. This casts a shadow of uncertainty for potential founders, further restricting capital to fund middle-market companies and exacerbating inefficiencies and valuation discounts.

The nascent institutional GP stakes landscape for emerging managers, those catalyzing the formation of small buyout managers with anchor capital, is about four years old. Steward is one of eight institutional players that is incubating this landscape. These new capital partnerships are alleviating the backlog of funding for new partnerships that catalyze US small businesses. This daunting fundraising environment has culled the field of emerging managers, eliminating the parvenues and pretenders and narrowing the pool of candidates to those with skill and determination.

The new administration appears favorable toward small and medium-sized US companies, which stand to gain from the planned Trump-era changes such as lower energy costs, reduced regulation and lower corporate taxes. FactSet estimates that the Russell 2000, a proxy for smaller US companies, will be the biggest beneficiary among the US indices, estimating a more than 1.2% increase in earnings for every 1% decline in corporate taxes.  

This positive support from Washington is scheduled to assist the stability created by the macroeconomic tailwinds. The US 10-year rate is now sitting near the levels where it began in 2024, inflation is in check, unemployment is on target and price discovery in private markets is improving. Macro factors are aligning to continue the DPI (distributions to paid-in) catch-up, while investors are readying to resume deployment, many teeing up new partnerships and exiting with secondaries where necessary.  

Searching for the Top 5 Things

How to explain this era of US exceptionalism?

While creating concentration risk for US public equity investors, Nvidia's rise accentuates the importance of data-driven approaches to looking around corners and securing an edge. Technology spending serves as a proxy for exceptional dashboards that allow companies to uncover market patterns and anticipate change. This recent period of US equity (public and private) outperformance may be less exceptionalism and more tech-enabling. 

Information and Communication Technology

Research and Development Spending

Source: Statista data as of 2024, Full Year 2022

Nvidia's founder, wunderkind Jensen Huang, exemplifies the power of continuous research and development with the evolution of the CUDA (Compute Unified Device Architecture) to allow clients to achieve faster speeds and better collaboration for computer-intensive applications. An open communications management style has also given them an edge. The T5T (Top Five Things) emails Huang encourages from all levels of staff help him to uncover paths to market-leading opportunities. His approach highlights the significance of staying close to the end markets, embracing fast failures and executing quick pivots.

Middle Market companies with ample growth trajectories — our coverage universe — continue to benefit from the boom in B2B SaaS systems, bolstered by private equity capital partnerships that can bring sector expertise to accelerate big data adoption tailored to smaller companies' systems. Private equity playbooks are increasingly filled with both human capital and data management strategies that help create market leaders. The rising demand for applications has propelled Technology, led by B2B SaaS, to become one of the largest private equity sectors, now representing 36% according to JP Morgan and Cambridge Associates — a trend extending its benefits across industries.



This tech-enabled strategy is seeping into industrial, consumer, healthcare, business services and real assets sectors, often facilitated by critical capital and sector-specific partnerships. We believe that US exceptionalism, amplified by the adaptive post-COVID rebound, has catalyzed the wide-scale adoption of enterprise systems across US Middle Market companies, a significant contrast to other developed economies.

What is in Store in 2025

Heading into 2025, we can only hope for less global uncertainty following the political shifts, conflicts and upheavals of 2024. That said, as new alliances and bilateral agreements take shape, opportunities will emerge that will anticipate how newly-placed global leaders will navigate a mix of economic and populist policies.

This year, we began to see the exponential benefits of capital being put to work by the US Small Business Administration, particularly in matching private equity capital, stemming from new programs enacted in the 2023 legislative changes. This ensures that US small businesses will have the necessary equity partnerships to continue to propel research and development as well as operational improvements.

Private equity is one of the most dynamic and impactful investment management strategies, with strong alignment between owners and managers. It offers a powerful playbook for effecting change. Together, we'll navigate the challenges and opportunities of 2025 and beyond, strengthening our partnership every step of the way.

Happy Holidays!

What We Are Reading

Blackrock. John Griffith III and Michael Pond, CFA, Understanding the Potential of Middle Market Companies.  They report that the Middle Market has now expanded to around 300,000 companies in the U.S., generating more than US$13 trillion in annual revenue and employing nearly 50 million people, 30% of private sector employment.

ImpactPHL. Noelle St. Clair of Allivate Impact Capital. Volume 74: The First Mover Advantage — An Investment Approach for Maximizing Impact. Noelle underscores the important impact of first movers. She lays down the challenge that investors face who are bold enough to be first movers and achieve outsized impact by investing catalytic capital.

Goldman Sachs. Jan Hatzius and Dominic Wilson. Asset Management Outlook 2025. Will tailwinds trump tariffs? The global economy is forecast to grow solidly in 2025 despite trade uncertainty. As the global economy comes off of another year of relatively strong growth in 2024, new and important variables are now in the mix with the election of Donald Trump and the Republican sweep of Congress.

Private Equity Wire. LPs set to decline re-ups amid liquidity crunch. Reporting on the findings of Coller Capital’s latest Global Private Capital Barometer, nearly all LPs (96%) plan to maintain or increase allocations to alternatives but are adopting a more cautious approach to reinvestments (re-ups), with 88% planning to decline reinvestment opportunities with some existing General Partners (GPs) over the next year.

Renaissance Capital. IPO Center. IPO performance on average is keeping up with the markets, although the divergence of some of the largest, including Lineage, continues to foster tepid investor interest.

Hamilton Lane. Chart of the Week. Fund Size ≠ Average Returns. Top-quartile, middle-market managers, however, have historically posted stronger returns than their peers in the mega/large space.

Bloomberg Businessweek. Carol Massar and Tim Stenovec. Addressing Systemic Inequity by Reducing Racial and Gender Bias in Investing. Daryn Dodson, Managing Partner at Illumen Capital, talks about the firm's Catalyst Fund designed to support entrepreneurs from underrepresented backgrounds. Carol Massar and Tim Stenovec.

Wall Street Journal. The Science of Success. The Secrets of the Man Who Made Nvidia the World’s Most Valuable Company. They’re called T5T (top five things) emails and they’re essential to Jensen Huang’s success. They allow him to gauge the pulse of the company and make absolutely sure that he’s getting the sort of insights that might never reach him otherwise. 

FS Investments Chart of the Week. Middle market PE funds outperform through rate hike cycle. Middle-market private equity has outperformed mega-cap PE since the Fed began to raise rates. It remains well positioned amid a cloudy rate outlook. More credit providers and less overall leverage have allowed them to navigate rate increases more adeptly.



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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