Key Takeaways
- • Federated Hermes' latest co-investment fund included two Australian investments, making up two of the three Asia-Pacific deals in its 14-company seed portfolio, according to InvestorDaily.
- • Brooks Harrington, CIO of private equity at Federated Hermes, said the firm targets the $100 million to $250 million segment of the lower mid-market, defined as enterprise values generally below $500 million.
- • The lower end of the market attracts about 10 per cent of private equity capital while representing 90 per cent of the investable universe, per Harrington.
- • Federated Hermes was the first institutional investor in about 40 per cent of its 14 portfolio companies, which Harrington said allows operational improvements to accrue to the buyer.
- • Federated Hermes recorded about 15 exits in the prior 12 months (seven to strategic buyers, seven to private equity funds, one IPO), and Harrington said institutional allocations in the US are largely fully deployed, with new capital coming from the wealth channel.
Summary
Federated Hermes' latest co-investment fund included two Australian investments, which accounted for two of the three Asia-Pacific deals in its seed portfolio of 14 investments, according to InvestorDaily. Brooks Harrington, chief investment officer of private equity at Federated Hermes, said the firm sources around 800 co-investment opportunities a year and expects to invest in about 20. He said two-thirds of the firm's Asia-Pacific private equity activity over the past year and a half had been in Australia, citing the country's language alignment, regulatory structure and status as a US ally, as well as its market for founder sales, succession processes and corporate carve-outs.
Harrington said the firm sees the lower mid-market, with deals between $100 million and $250 million, as a solid area for deploying capital. He described the segment as companies with enterprise values generally below $500 million, while noting the fund's current portfolio has a median enterprise value of about $90 million. The firm was the first institutional investor in roughly 40 per cent of the 14 portfolio companies, a position Harrington said allows investors to work with founders on professionalising management, sales, go-to-market and finance functions, with the value from those improvements accruing to the buyer.
Harrington cited a statistic that the lower end of the market has attracted about 10 per cent of private equity capital while representing 90 per cent of the investable universe. He said that 60 per cent of capital raised in the last 12 months went to just 12 firms, with strong brands and wealth-channel access directing capital toward established managers. Larger transactions, he said, require more debt and are more exposed to higher interest rates, and selling large companies is difficult while the IPO window is effectively shut. He said a business bought at a $90 million valuation could potentially reach about $300 million after five years of growth, a level at which strategic and private equity buyers could acquire it.
On exits, Harrington said Federated Hermes recorded about 15 exits in the previous 12 months: seven to strategic buyers, seven to private equity funds and one through an IPO. He noted that about 40 per cent of private equity-backed companies are more than seven years old, and that private equity holds about US$1.3 trillion in dry powder. He said the lower mid-market carries risks, including less experienced management teams and the cost of filling leadership gaps, and that emerging managers are not necessarily riskier than established firms, though limited partners often prefer well-known brands. Looking ahead, Harrington said institutional investors in the US are relatively fully allocated, that industry growth will likely slow, and that exits will not clear in an orderly way, leaving secondary markets with a significant role. "We're operating on the assumption that this is the new normal," he said.
Harrington said the firm sees the lower mid-market, with deals between $100 million and $250 million, as a solid area for deploying capital. He described the segment as companies with enterprise values generally below $500 million, while noting the fund's current portfolio has a median enterprise value of about $90 million. The firm was the first institutional investor in roughly 40 per cent of the 14 portfolio companies, a position Harrington said allows investors to work with founders on professionalising management, sales, go-to-market and finance functions, with the value from those improvements accruing to the buyer.
Harrington cited a statistic that the lower end of the market has attracted about 10 per cent of private equity capital while representing 90 per cent of the investable universe. He said that 60 per cent of capital raised in the last 12 months went to just 12 firms, with strong brands and wealth-channel access directing capital toward established managers. Larger transactions, he said, require more debt and are more exposed to higher interest rates, and selling large companies is difficult while the IPO window is effectively shut. He said a business bought at a $90 million valuation could potentially reach about $300 million after five years of growth, a level at which strategic and private equity buyers could acquire it.
On exits, Harrington said Federated Hermes recorded about 15 exits in the previous 12 months: seven to strategic buyers, seven to private equity funds and one through an IPO. He noted that about 40 per cent of private equity-backed companies are more than seven years old, and that private equity holds about US$1.3 trillion in dry powder. He said the lower mid-market carries risks, including less experienced management teams and the cost of filling leadership gaps, and that emerging managers are not necessarily riskier than established firms, though limited partners often prefer well-known brands. Looking ahead, Harrington said institutional investors in the US are relatively fully allocated, that industry growth will likely slow, and that exits will not clear in an orderly way, leaving secondary markets with a significant role. "We're operating on the assumption that this is the new normal," he said.
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