The crowd is fighting over 1%. In this market, it pays to look elsewhere

Note: this interview was recorded Monday 15 June 2026

Private equity is no longer a niche corner of the investment universe. The asset class now manages more than US$5 trillion globally, with pension funds, sovereign wealth funds and family offices continuing to increase allocations in pursuit of returns unavailable in public markets.

Yet success has created its own challenges. According to Bain & Company, private equity firms are currently sitting on more than US$3.6 trillion worth of unsold assets spread across almost 29,000 companies - a record backlog created by higher interest rates, subdued IPO activity and a slower mergers and acquisitions market. 

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At the same time, ever-larger pools of capital are competing for an increasingly concentrated universe of large-scale deals, pushing managers to search harder for differentiated sources of return.

That backdrop makes Schroders' long-standing focus on the small and mid-market especially interesting. In my conversation with Claire Smith, she laid out a striking imbalance at the heart of private equity.

"Seventy cents in every dollar goes into the large cap private equity part of the market and there's only 1% of companies by number", says Smith.

'Small-to-mid cap is the other 99% of companies by number and attracts only 30 cents in every dollar."

It is a remarkable statistic. Most of the industry's capital is chasing a tiny fraction of the available opportunity set.

For Smith, the more interesting hunting ground lies elsewhere. In founder-led businesses, family-owned companies and market leaders operating below the radar, where competition for deals is lower, valuations can be more attractive and operational improvements can have an outsized impact on outcomes.

"We're often the first institutional capital that creates often some pretty easy value creation levers to pull", says Smith

In the interview above, Smith explains why today's environment is creating a particularly attractive backdrop for small and mid-market private equity. She shares where Schroders is hunting, what it looks for in portfolio companies, why multiple exit pathways matter, and how secondaries and markets such as India are creating new avenues for growth.

INTERVIEW SUMMARY

Buying businesses customers can't live without

Once Schroders identifies an attractive corner of the market, the focus shifts to finding businesses that can grow regardless of economic conditions.

Smith says the team consistently gravitates towards companies with recurring revenues, sticky customer relationships, strong cash generation and healthy margins. The goal is to own businesses that customers are reluctant - or unable - to switch away from.

"We still like SaaS and that's still a core component because it has this recurring, sticky revenue business."

Healthcare remains another favoured sector. In particular, Schroders likes businesses operating at the intersection of healthcare and technology, where proprietary data, regulatory requirements and high switching costs help create durable competitive advantages.

One recent investment supports psychologists and behavioural healthcare providers, managing highly sensitive patient information that cannot easily be migrated elsewhere.

The common theme is resilience. As Smith puts it, Schroders is looking for companies that are mission-critical to their customers rather than businesses dependent on economic tailwinds.

Why today's vintages look attractive

Private equity investors often discover whether they paid too much years after the deal is completed.

With hindsight, Smith believes the ultra-low-rate environment created some expensive vintages (i.e. the year the deals were minted), particularly during 2020 and 2021.

The subsequent rise in interest rates changed the equation.

Higher borrowing costs reduced the amount of leverage available to support transactions and forced investors to become more disciplined around pricing and fundamentals.

"Interest rates rising has really meant that suddenly people have had to stop and reassess and rerun their models."

For investors deploying capital today, Smith believes that reset has created a more attractive entry point than existed during the peak of the post-pandemic boom.

Looking where growth is accelerating

While Schroders remains focused on healthcare and software globally, geography is increasingly shaping opportunity. One market that continues to stand out is India.

Despite strong performance in listed markets, Smith believes private markets continue to offer compelling opportunities, particularly in technology-enabled businesses benefiting from the country's emergence as a global innovation hub.

Recent investments include businesses providing data analytics and social media intelligence services to customers around the world.

China, meanwhile, is attracting a more cautious approach as geopolitical uncertainty continues to weigh on sentiment and capital flows.

Creating value after the deal is done

Buying the right company is only part of the equation. Smith says value creation typically falls into three broad categories: professionalisation, international expansion and mergers and acquisitions.

Some businesses need experienced management teams and stronger governance structures. Others have opportunities to expand into new geographies. In many cases, acquisitions can accelerate growth by consolidating fragmented industries. Smith adds, however, that it is not one-size-fits-all.

"It's really case by case, dependent on the company."

Importantly, Schroders is also increasingly seeing opportunities to integrate AI into portfolio companies, both as an operational tool and as a source of investment exposure.

While AI-related investments represent only a small part of the portfolio, Smith highlighted exposure to businesses supporting large language model development as well as Suno, an AI-powered music generation platform that recently surpassed two million paid subscribers.

The exit advantage investors often overlook

One of the biggest misconceptions about private equity is that all exits depend on IPO markets. Smith argues that is particularly untrue in small and mid-market private equity.

A recent investment in a European ophthalmology platform demonstrates why. Schroders and its partners expanded the business through acquisitions and new clinic openings before receiving an unsolicited approach from EssilorLuxottica (think eyewear brands such as Ray-Ban, Oliver Peoples, and every fashion label that's worth its salt).

The eventual buyer was not the one the team originally expected.

"The good thing about small-to-mid cap is you have all these options available."

That flexibility is becoming increasingly important as private markets evolve.

Smith expects GP-led secondaries and continuation funds to remain one of the fastest-growing areas of private equity, allowing managers to retain ownership of high-quality businesses rather than selling simply because a fund reaches the end of its life.

For Schroders, however, the broader philosophy remains unchanged.

Find businesses with durable economics. Improve them. Grow them. Then give multiple exit pathways for the opportunity to maximise value.

Managed Fund

Schroder Specialist Private Equity Fund

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