After years of working with firms to help business owners monetize their life's work, Jabbar Abdi and his partners set out 10 years ago to do the same on their own with Sidereal Capital Group. At the 2023 Baltimore Smart Business Dealmakers Conference, he says he invested some $100 million in capital and oversees a number of portfolio companies.

"Our returns have been tremendous," Abdi says. "And we are now in the process of raising a $200 million institutional fund. So, the additional gray hairs on my head are not just from my children, but also from the doing that."

The fundraising market, he says, is hard no matter what. That's because there are variety of investors, all of whom have different preferences for their portfolio. But he says his firm has been successful despite the challenges in the marketplace. He believes that's a function of where his firm plays.

"As a smaller firm, that's where you generate the most alpha," he says. "Oftentimes, when you're, as they say, young and hungry — although I'm hungry, but not necessarily as young as I used to be — and everybody's interests are aligned, you're putting your blood, sweat, and tears into a situation where, as you get bigger and bigger funds, it becomes more and more of an asset-management game. And so, I've heard a lot of horror stories of guys on the larger end of the market having trouble raising funds. Before, on a first close, they were raising easily $900 million on a multi-billion-dollar fund. And that first close is now, on their latest fund, more like $200 (million). So, things are tough all over. But there is a strong sense of focused effort in specific areas. Lower middle market has become back in favor as many of the VC-type investments, folks were pouring their money into that earlier and now the distributions are not as frothy. It provides an opportunity for folks to get in early with guys like ourselves."

He says in order to provide downside protection in an uncertain market, structures such as seller notes, earnouts and subordination are becoming more common.

"That is helping get deals across the threshold because it's just about risk mitigation," he says. "It's a delicate balance to make sure that we prefer the selling shareholder to rollover, to partner with us so everybody's incentives are aligned. And we have what I like to call sucker insurance in case we're sold a bill of goods, which normally doesn't happen, but that structure provides a nice buffer to a volatile marketplace."

He says one of the metrics that gets him excited is the revenue or EBITDA per employee, as it can show the efficiency and the operating leverage that the underlying business has.

"What we try and do is continue that and hopefully can grow it based on using automation of some sort, whether that be implementing ERP systems, whether that be implementing other capital equipment that can allow you to produce more product with hopefully the same level of headcount."

With buyers, generally, spending more time on due diligence and ensuring there's ample investment in technology, Abdi says for him it's become a delicate balance between free cash flow conversion rates. If it's CapEx heavy, he says it's not really a deal for him. But if the math shows the investment has a clear path to payoff, then it's something to consider.

"One of our earlier investments was making $100,000 of EBITDA per employee and we were like, 'Great, let's just continue to keep that train going, not only hire a few more employees, but upgrade whatever needs to be upgraded to maintain that,'" he says. "But we're doing a lot of homework upfront to understand that dynamic before we get to the LOI stage."

Overall, Abdi says he's bullish on the overall market. One of the things that he says he's taking advantage of is general demographics — the silver tsunami of baby boomers who have been entrepreneurial, built businesses and are now looking to monetize their life's work.

"I'm overall bullish on the number of firms out there that are hitting this inflection point and we are properly sized to partner with these folks and help grow their legacies and preserve their legacies," he says.