Watch the Video: Why I’m Expanding Into Small Business Private Equity
For more than a decade, multifamily real estate delivered strong returns. From roughly 2010 through 2022, apartment values climbed steadily as rents increased and interest rates stayed low. But markets move in cycles, and the last two years reminded investors of that reality.
Higher interest rates and new construction have slowed multifamily performance in many markets. Some operators are seeing rent pressure from newly built Class A properties offering aggressive concessions to fill units. That environment has made new acquisitions harder and forced operators to focus more on improving operations.
At Nighthawk Equity, our first priority remains protecting and improving our existing multifamily portfolio. But at the same time, we’re also thinking about the future.
Where will the next opportunities come from?
After studying the landscape for the past two years, I’ve become increasingly interested in a different asset class: small business acquisitions, also known as lower-middle-market private equity.
In this article, I’ll explain:
Private equity simply means investing in privately owned operating businesses.
Large private equity funds have been doing this for decades. Typically they buy companies worth $50 million to several hundred million dollars, improve operations, and sell them later at a higher valuation.
More investors are entering the lower middle market—buying smaller companies with roughly $5 million to $10 million in revenue.
At its core, this strategy is pretty simple:
You acquire an established operating company that already produces consistent cash flow and then improve it over time.
Many high-net-worth investors already allocate significant capital to this asset class. A typical portfolio might include:
Other alternative investments
Private equity often represents a meaningful portion of that allocation, because it offers exposure to operating businesses rather than financial assets.
For investors who already own real estate and stocks, owning part of a profitable business can provide another layer of diversification.
Multifamily investing remains a core strategy for us. We are not exiting apartment investing, and we still believe strongly in the long-term fundamentals of housing.
But good investors always pay attention to market cycles.
From 2010 through 2022, multifamily experienced an unusually long expansion. Property values climbed steadily as rents increased and borrowing costs stayed low. Then the environment shifted quickly.
Interest rates rose dramatically, and at the same time a wave of newly constructed apartments hit many markets.
In many cases, those new Class A properties lowered rents to fill units. That pressure often spilled into nearby Class B and Class C properties, forcing operators to adjust pricing and concessions.
As a result, many multifamily investors have slowed acquisitions and shifted their focus toward operations and asset management.
That’s exactly what we’ve done.
Our team today is primarily focused on improving property performance and protecting investor capital. But while doing that, we’re also asking a forward-looking question:
What opportunities should we prepare for next?
After studying the landscape for the past two years, private equity has emerged as a compelling complement to our real estate strategy.
Three factors make it especially interesting right now:
Different asset classes behave differently during economic cycles. Businesses, real estate, and financial markets do not always move together. Adding business acquisitions creates more balance in a portfolio.
Many profitable small businesses generate significantly higher cash flow yields than stabilized real estate. That income can complement the tax-advantaged but often slower cash flow of real estate investments.
Thousands of baby-boomer business owners are approaching retirement.
Many spent decades building their companies but have no clear succession plan. In fact, studies suggest a large percentage of business owners do not have anyone ready to take over when they retire. This creates opportunities for buyers who can step in, preserve the business, and help it grow.
Not every business is a good acquisition target. The key is identifying companies with strong fundamentals, stable demand, and leadership teams capable of operating the business through a transition.
Ideally, we look for businesses with several characteristics.
First, the company must already have a proven track record. Businesses that have been operating for at least ten years have already demonstrated that they can survive economic cycles. They tend to have established customer relationships, stable demand, and operational systems that actually work.
Second, leadership matters.
The best acquisitions are companies where the owner is stepping back but has already developed a strong second-in-command. That person typically understands the team, the customers, and the day-to-day operations of the business. Having that leadership continuity dramatically reduces transition risk.
Third, we focus on companies generating roughly $5 million to $10 million in annual revenue. Businesses in this range are often overlooked by large private equity funds, but they are still large enough to have real infrastructure and management teams in place.
Finally, we look for industries that are difficult to disrupt.
Right now, that tends to include skilled trades and essential services, such as:
Maintenance and repair services
These businesses provide services people need regardless of economic conditions.
If someone’s air conditioning fails in the middle of a Texas summer, they are not going to wait six months to fix it. They are going to call someone immediately.
That kind of demand creates durable revenue.
In many ways, business acquisitions resemble real estate investing.
You purchase an income-producing asset, improve operations, and increase the value of the asset over time.
But the economics can look very different.
Most small businesses are purchased based on a multiple of earnings. For example, a company generating $2 million in annual profit might sell for roughly five times earnings, or about $10 million.
Compared with many stabilized real estate assets, that represents a relatively high cash flow yield.
Another opportunity comes from operational improvements. Many smaller companies rely heavily on word-of-mouth marketing and have limited systems for growth.
Introducing improvements in areas like these can make a major difference:
Financial reporting and controls
Even modest improvements in these areas can significantly increase profitability.
There is also the potential for multiple expansion.
As companies grow and professionalize their operations, their valuation multiple often increases. A business purchased at five times earnings may eventually sell for eight or ten times earnings as it becomes larger and more sophisticated.
That means investors benefit from both higher earnings and a higher valuation multiple.
For many sophisticated investors, the best strategy is not choosing one asset class, but combining several. Real estate, private equity, and debt investments each offer different advantages. Real estate provides:
Tangible assets
Private equity provides:
Exposure to operating businesses
Debt investments can provide:
Lower risk positions in capital stacks
Together, these asset classes create a balanced portfolio. That’s the direction we’re moving toward. Our goal is to continue building strong multifamily investments while gradually adding other carefully selected opportunities.
Multifamily real estate remains a core part of what we do.
But good investors stay aware of market cycles and remain open to new opportunities.
Small-business acquisitions represent a compelling complementary strategy because they offer:
Opportunities created by retiring business owners
We’re approaching this strategy carefully and deliberately.
Just like in real estate, success ultimately comes down to buying the right assets, working with the right team, and focusing on long-term value creation.
For investors who already understand real estate, adding private equity can be a powerful way to build a more resilient portfolio.