New wave of SME buyers mining for ‘diamonds in the rough’ in Singapore, Asean

[SINGAPORE] New types of buyers are emerging for small and medium-sized enterprises (SMEs). Unlike traditional private equity (PE) firms, these niche players are open to smaller deals and have longer, flexible investment horizons to find and polish these hidden, diamonds in the rough.

SMEs tend to be overlooked in the mergers and acquisitions (M&A) space. Middle-market PE firms typically pursue deals between US$50 million and US$500 million, while large-cap firms’ deals can exceed US$5 billion.

PE firms also strive to exit investments within three to seven years to realise their returns.

In contrast, some new M&A players in Singapore are open to deals as small as S$1 million, with investment horizons spanning more than 10 years.

They aim to change or bolster the leadership of acquired SMEs too, which could help in succession planning and preserving business legacies.

Giving SMEs a new lease of life

Gen Capital Partners, for instance, is “corporatising and scaling” entrepreneurship through acquisition, that is, acquiring and running an established business, rather than starting one.

Founded in August 2024, the company aims to partner “operators” – individual would-be entrepreneurs – to buy out profitable regional businesses whose owners are looking to retire or exit. It is gunning for deals of S$3 million to S$20 million.

Co-founder and CEO Eric Koh said that this ushers talent into SMEs – generally “not the first port of call” for aspiring entrepreneurs – while giving startup founders an alternative, as the venture capital winter “has made the odds of succeeding in the startup world harder today”.

Once deals are identified, Gen Capital and the intended new boss will search for investors to raise capital for acquisition. Together, they will take an equity stake of up to 30 per cent in the target, with the rest held by investors.

“SMEs are not a common instrument for investment,” said Koh. “Investors can find it difficult to find such businesses in the first place as they don’t actively market themselves.”

Gen Capital thus provides an opportunity to “systematically” invest in financially and operationally viable SMEs that have been vetted.

In contrast, startup Oneteam wants to create “employee-owned” entities, where employees themselves have a stake in its targets. This model has been adopted by some US companies but is less common in Asia.

“We believe that when employees have ownership in the business, they are vested in (its) growth,” said co-founder and CEO Kevin Boo. “They are incentivised, feel a deeper sense of purpose and productivity – and that translates into business growth.”

Oneteam intends to buy SMEs from retiring owners and groom key existing employees – such as managers or technicians – to operate these.

These new leaders may get stock incentives or a share of profits. Alternatively, Oneteam might support them to launch their own businesses.

Set up in April 2024, Oneteam is backed by venture capital firm Wavemaker Ventures and has raised S$3.5 million. It is aiming for deals of S$1 million to S$20 million for now, but is open to bigger transactions.

Another new player is M3I, which aims to acquire “high-potential” SMEs that need operational support and strategic capital, in industries ripe for consolidation.

Its “buy-and-build” strategy – usually used by PE firms – involves acquiring a platform company, then making add-on acquisitions.

Founder and executive director Malcolm Wong is eyeing deals of S$5 million to S$15 million, and intends to take controlling stakes using personal funds.

He will then bring in an external operator to work with the SME’s existing owners to transform the business.

Wong said SMEs in the region tend to struggle with poor financial management, operational inefficiencies and digitalisation. The majority are also undercapitalised and find it hard to access funding.

“Many do not know how to develop these capabilities internally. We want to acquire SMEs that are good but do not know the right levers to pull for growth,” said Wong, who started M3I in November 2024.

Acquired companies will get help to transform from an “operations council” set up by M3I, with part-time specialists in areas such as marketing, finance, digitalisation, artificial intelligence, legal and tax.

Jerry Tan, director of corporate advisory at consultancy RSM Singapore, said these niche acquirers “focus on ‘diamonds in the rough’ – small but differentiated SMEs that show potential, but have traditionally been overlooked due to their size and lack of polish”.

Beyond providing capital, these acquirers offer continuity, leadership and operational capabilities to SMEs, he said. “This helps to solve a real pain point for SME owners and offers them an additional avenue for succession and exit.”

Building a portfolio of companies

All three M&A players intend to build a portfolio of companies and provide shared services such as finance, human resources, marketing and digital infrastructure.

Gen Capital has about 30 potential operators sourced through Koh’s personal network. “What we need to do is find an asset that aligns with their interests, in terms of sectoral experience,” he said.

It is in the process of acquiring a corporate secretarial services provider in Singapore and an electronic health records firm in Malaysia.

After four to five deals, Gen Capital may consider creating an investment holding company to raise bigger funding rounds as opposed to finding investors on a deal-by-deal basis.

Oneteam has already acquired a facilities management firm. Boo hopes to scale Oneteam up in the next five years, so it will be “ready to acquire 10 companies per year”.

There are plans for two to three more funding rounds, though he declined to disclose the amount to be raised.

In the future, newly groomed leaders may be cross-deployed to run other portfolio companies. Oneteam is also open to bringing in external leaders if there are no suitable employees, and will develop such a pipeline.

Meanwhile, Wong sees opportunities for consolidation in the home improvement industry. M3I has acquired one such firm in Singapore and will make bolt-on acquisitions to scale this “anchor” SME into a larger business.

He intends to replicate this model across other fragmented industries, such as equipment maintenance or engineering services.

Not bound by fixed exit timelines

RSM’s Tan said these players have a “critical role” in consolidating fragmented markets and upgrading SMEs.

“By acquiring and professionalising smaller, fragmented businesses, they’re effectively creating tomorrow’s middle-market companies – which may be attractive for subsequent investment by traditional private equity and strategic investors,” he added.

That is indeed Wong’s end-goal. Once acquired SMEs have been grown to a “certain size”, they will be transferred to a special-purpose vehicle to get third-party growth-stage funding.

“By then the company would be investment-ready, because we would have improved it operationally. This also helps to close the valuation gap,” he said. One exit for M3I is selling the SME to a mid-cap PE fund, though Wong has no timeline for this.

Gen Capital intends to hold its portfolio companies for the long term. Unlike traditional PE with fixed exit timelines, a long-term approach creates better outcomes for all, “from the original business owners concerned about their legacy, to employees worried about job security”, said Koh.

“Businesses themselves will benefit from ‘patient capital’ and strategic investments, which might take years to fully realise their value.”

But Gen Capital will still look out for opportunistic exits, such as putting up acquirees for an initial public offering or selling them to a PE firm.

Oneteam would prefer not to sell its stakes, though an eventual trade sale or public listing are possible exit strategies.