In a recent insightful fireside chat, David Fann, Partner at VSS Capital Partners, pulled back the curtain on the dramatic evolution of private equity. From an industry of 200 firms to a sprawling ecosystem of 10,000, Phan provided a masterclass on where the smart money is going and how top firms are adapting to secure outperformance in a highly competitive landscape.

Drawing on decades of experience from the “early days” of private equity to his current role, Fann outlined the critical trends that every investor and entrepreneur needs to know.

Here are the key topics and takeaways from their conversation.

The Staggering Evolution of Private Equity

David Fann framed the industry’s growth with a powerful statistic that underscores its dominance:

• Then: 200 private equity firms globally, buying businesses at 5-6x EBITDA.

• Now: 10,000 private equity firms globally, with valuations between 9-20x EBITDA.

Most strikingly, he revealed that there are now roughly 60,000 private companies held by private equity in the U.S.—about twelve times more than the number of publicly traded companies. “That’s a staggering statistic,” Fann noted, highlighting private equity’s central role in the modern economy.

The Sweet Spot for Outperformance: The Lower Middle Market

In a market saturated with capital and competition, Fann identified a clear area of opportunity:

• The Most Efficient Market (Large Buyouts): Highly competitive auctions run by large investment banks lead to “fully priced” assets with less room for value creation.

• The Highly Inefficient Market (Lower Middle Market): This segment—companies with $5M-$15M in EBITDA—is where Fann sees the best chance for outperformance. With a vast universe of ~300,000 such companies in North America and fewer specialized firms, there is more potential to find undervalued gems.

The Caveat: “Dispersion of returns in the lower end of the middle market tend to be wide.” This makes manager selection more critical than ever.

The VSS “Structured Capital” Approach: A Win-Win Formula

Fann detailed VSS’s differentiated strategy, refined over 20 years, which is key to their “persistence” of performance:

• What it is: Instead of using third-party debt, VSS provides a flexible capital solution that combines senior debt, junior debt, preferred equity, and common equity in a single package.

• The Entrepreneur’s Benefit: Lower cost of capital and the ability to maintain control of their business while gaining a value-creation partner.

• The Investor’s Benefit: Significant downside protection and an “asymmetric upside opportunity” that targets traditional private equity returns with managed risk.

“Value Creation” is More Than a Buzzword: The Proof is in the Pudding

For Fann, “value creation” is meaningless without tangible results. He defined it through VSS’s track record:

• Scaling Businesses: On average, VSS portfolio companies grow revenue from ~$80M at acquisition to over $150M at exit.

• Boosting Profitability: EBITDA typically expands from $9-10M to north of $15-20M.

• How it’s Done: Active partnership through board seats, identifying acquisition targets, product line extensions, and supplementing management teams.

The Future of Private Equity: Democratization and Consolidation

Fann highlighted two powerful secular trends reshaping the industry:

1. The Democratization of Capital: The fastest-growing source of capital is no longer large institutions but the high-net-worth and private wealth channels. “The democratization of private equity and private credit is a secular trend,” Fann stated, allowing individual investors to access this high-returning asset class through evergreen funds.

2. An Impending Shakeout: Fann was direct about the current challenges, calling this “the hardest fundraising environment ever.” He predicts a industry consolidation: “Those that are third and fourth quartile firms… may not make it through this cycle. So we might see a consolidation in private equity.”

Key Takeaways for Investors and Entrepreneurs:

• For Investors: Scrutinize “proof statements” of value creation. In a tough market, focus on firms with a differentiated strategy and a proven record of persistence.

• For Entrepreneurs: The right private equity partner is not just a source of capital but a true ally in scaling your business. Look for a firm whose capital structure and partnership model align with your long-term vision.

David Fann’s message was clear: while the private equity landscape is more complex than ever, disciplined strategies focused on inefficient markets and genuine partnership will continue to find and create exceptional value.

Key timestamps:

00:06 Introduction to the Fireside Chat
00:39 David Fann’s Career Journey
02:00 Overview of VSS
03:03 Current Landscape of Private Equity
05:50 Market Dynamics: Large vs. Small Firms
08:36 VSS’s Unique Investment Approach
11:34 Trends in EBITDA Multiples
13:51 Engaging with Entrepreneurs
18:49 Investor Relations in Private Equity
22:30 The Evolving Role of Investor Relations
24:39 Future of Private Equity: Challenges Ahead