Last updated: September 26, 2022

What is Micro Private Equity?

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What is Micro Private Equity?

Micro Private Equity is a term used for an investment fund that buys into small or micro businesses and is a common term in the mergers and acquisitions industry.  To understand micro private equity, we need to know what private equity is and how it works

Understanding Private Equity

Private equity is the ownership of a business that is not publicly listed on a stock exchange. Private equity is primarily supported by what is known as high-net-worth individuals (HNWI) and investment firms.

These Private Equity firms specialize in buying controlling shares in private companies or gaining majority shareholding of public companies and their long-term plan is often to delist them from stock exchanges.

Private equity requires the direct injection of funds necessary to gain control over a running business’s operations. This means that often a sizable amount of capital is needed which means that only larger funds can work in the industry.  

The private equity industry is mainly run by institutional investors ranging from pension funds, some mutual funds, and private equity firms run by investment banks. 

What is Micro Private Equity -Private Equity

Explaining Micro Private Equity

Micro Private Equity is also known as Micro PE or Micro Cap Private and it defines investor funds that merge or buy small businesses. They also invest in what is labeled as micro businesses in the mergers and acquisitions industry.

Compared to the traditional private equity model explained above, micro private equities usually invest in businesses valued at under US$5million. However, at times buy-out prices may move above this value. 

Why Micro Private Equity?

Micro Private Equity is relatively new and has emerged to benefit from the systemic gap in the venture capital sector. Most venture capitalist businesses concentrate on a small area of the market where the average venture capital portfolio makes up the majority ownership positions in companies, and the usual portfolio is in the range of $20 million. This means venture capitalists have a lot of exposure to the small business segment. 

What is Micro Private Equity -Micro Private Equity

Venture Capital Power Law

The Venture Capital Power Law essentially means that the odds generating massive returns increases the earlier you invest in a company.  We can see this in many famous examples, particularly in tech, where Apple's little known third co-founder Ronald Wayne sold his 10% stake in 1976 for $800. At the time of writing this article Apple/AAPL is valued at $2.489trillion, so that early stage $800 would be worth $248 billion in under 50 years.

Venture Capitalists are always looking for what they hope is the next Apple/AAPL by investing the equivalent of $800 in 1976 in today's money in micro companies of today

Of course not all will have the returns of Apple/AAPL but they hope that some of the successful ones will make most of their profits and will make up for their early investments that fail.

The main aim for private equity and micro private equity is to earn a positive return on the capital invested (positive ROI). The investment timeline for these is usually between 4 and 7 years. The expected outlook is that the eventual sale of capital will also yield a positive return.

The Micro Private Equity Formula

The majority of Micro Private Equity firms are looking to buy into their target businesses, help them evolve, grow and then sell them. Most target businesses are tech and web-based businesses like SaaS and specialized ecommerce firms.  Some other Micro Private Equity funds will focus on long-term investments.


This long-term investment module has grown in popularity in recent years, primarily as the entrepreneurs that successfully launched, expanded, and sold off their small businesses use their earnings to buy into other promising companies and help them grow. 

The Economics of Venture Capitalism and Micro Private Equity

Venture capital (VC) is a smaller segment that falls under private equity. It is a form of financing that investors known as venture capitalists offer to emerging companies or any small business that shows potential to continue its growth over the long term. This means that Venture Capital can be taken as investing private equity in newer industries. 

The venture capital industry is designed around a minority ownership structure that demands that there are clear and successful exit points to be beneficial for both the business and the investors behind the venture capital.

For example, consider a $100 million mid-stage venture firm that holds 20% in a startup. This 20% was worth an investment of $5 million. If the company sells for $200 million, this would be seen as a successful investment from a VC perspective. The return of $40 million is just a return of 25%, which is just satisfactory for the fund.

However, if the business sells for $100 million, the VC is a failure. The return of $25 million is just a return of 12.5%, which is negligible for the fund. This makes venture capital financing challenging.

What is Micro Private Equity -Venture Capital

Micro Private Equity funds differentiate themselves from other equity funds by their target companies. These funds usually look for small businesses that are earning high returns by operating in a small niche and making a lot of surplus cash. Most of the successful players in the industry earn from technology or internet-based businesses.

The Micro Private Equity sector is even clearer when we compare it to the more conventional Private Equity investing. Traditional Private Equity funds will rarely consider purchasing small businesses that have a valuation of less than US$5 million.

This gap allows Micro Private Equity funds the opening to pick up the companies that match their requirements with little opposition. They can then develop them to the level that they get to a size that is attractive for a traditional Private Equity firm and unload them at a profit.

After understanding Micro Private Equity, you might be also interested in What are Seller Notes? and what is an EBITDA bridge?


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