Small and medium-sized businesses are the lifeblood of high performance, developed economies, yet they are often overlooked as an investment opportunity.
But SMEs can be attractive financial assets and important portfolio diversification. And I am primarily talking about more established businesses here and not pre-revenue start-ups.
However, investing in the established SME space takes many forms and it’s fair to say, they are much less understood by the majority of investors.
I will save those many and varied options for another post, but for now, what’s the draw of SME investing?
🎯 More straightforward
SMEs which have been around for a decade or so are usually doing something right and are normally more transparent from a due diligence point of view. They will often focus on a single sector, making it easier to understand and analyse the core business.
🎯 Get ahead of institutional investors
Below a certain level of EBITDA, there is typically less interest from institutional investors, meaning that first, there is less competition to invest (and therefore a smaller price tag) and second, there is an opportunity to scale and sell to this kind of buyer.
🎯 Dividend growth potential
Many SMEs are growing rapidly and have significant potential for dividend growth. Investing in a small business with high dividend growth potential can lead to significant and increasing financial gains over time.
🎯 Spread the risk
SMEs often receive less interest from investors than larger companies, due to being perceived as riskier investments. However, there are several smart ways to distribute your capital across multiple SMEs, to lower your risk exposure, as part of an overall diversification strategy.