Equanim Capital LLC

Equanim Capital LLC

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Equanim Capital is private investment concern focused on investing strategies and services to deliver and realize long-term value and continuity to Lower Middle Market private companies.  Equanim works with high net worth individuals, family offices fund sponsors and investment managers in a principal or advisory role.  Long term relationships are valued over engagements limited to a single transactional assignment. 

 

An investment philosophy of buy, operate and build strategy Control positions with management maintaining a significant equity ownership is the preferred approach.  We believe this is the best means to ensure alignment of interests and common focus.  A low to moderate financial leverage capital structure is typically employed. 

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Investment Candidate Profile

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• Size: $1.25 to $5 million EBITDA: Sweet Spot $2–3 million

  • Sufficient company infrastructure/systems/management

  • Acquisition pricing umbrella (small company discount optimization) below $5 million EBITDA

• ​Competitive Position:

  • Niche/oligopoly/monopoly

  • Protected regional factors for less differentiated products/services

  • Differentiated, non-commoditized product or service

• Sectors:

  • Manufacturing

  • Value Added Distribution

  • Services

  • Consumer Non-Durables

• Moderate organic growth:  GDP +1-5%

  • Lower growth companies with visible pathway to higher growth

  • Acquisition Potential: vertical or horizontal

• Consistent Profitability & Free Cash Flow generation

• Relatively low fixed asset intensity (Maintenance CapEx <2.5% of Sales)

• Management: 

  • Sufficient  succession to maintain status quo

  • Ability/willingness of seller to continue leading (diminished role) and retain meaningful equity interest

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Typical Financial Characteristics

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• EBITDA $1.25-5.0 million

• EBITDA Margin: 10% to mid/high teens

• EV/EBITDA Acquisition Multiple: 4.0 to 5.5x

• Working Capital Intensity: 20-25% of Sales

• Maintenance Cap Ex: 1 to 2.5% of sales

• Asset Based Borrowings: 1.0 to 1.25X EBITDA

• Unsecured / Term Loan: 1.0 – 1.5X EBITDA

• Total Leverage: not greater than 2.5X

• Modeled IRRs: at 4.0 to 5.0 EV/EBITDA multiple range: 17 to low 20s%

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Why Invest In Lower Middle Market Companies?

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• An established and profitable Lower Middle Market (LMM) company ($1.5 million to <$5 million EBITDA) is an attractive asset for long term private investors

• The transaction market for smaller companies prone to inefficiencies for economic and structural reasons:

  • Values realized are less than what the sustainable cash generation capacity would suggest (the Small Company Discount or “SCD”)

  • LMMs are much less “financialized” as compared to larger companies: Real Asset vs. Financial Asset

• SCDs are generally persistent over time and through market cycles

• Prime drivers of the SCD are:

  • Lack of access to capital/higher cost of capital (relative scarcity of institutional capital)

  • Uncertainty of secondary liquidity

  • Information/reporting deficiencies

  • Management depth & succession risk

  • Higher small company mortality rates

• Retaining the value in a successful small business over the long term is economically superior to selling and reinvesting the after-tax proceeds

• Cash generative moderate growth small companies can be viewed as either “Growth Annuities” or platforms to scale up organically of via acquisition