Praemium Investment Leaders

Live at AltInvest: Size matters, Small-Cap delivering outsized returns

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Private equity has evolved dramatically over the past two decades, with many firms chasing progressively larger deals as they scale. Claire Smith, who leads Schroders Capital's private markets business in Australia, explains why they're deliberately swimming against this tide by maintaining a focus on small and mid-cap opportunities.

During our conversation at the 2025 Premium Alt Invest Forum, Claire reveals the mathematical logic behind their strategy: "It's much easier to double the size of a small company than it is to double the size of a large company." This simple principle drives their pursuit of diversification from listed markets through companies with truly idiosyncratic risk profiles.

Praemium Limited is the issuer of the Investment Leaders and Advice Leaders podcasts. These podcasts are for information purposes only and aren't tailored to individual financial situations and do not contain financial advice. Views expressed by presenters may not align with Praemium's and nothing in this podcast should be seen as an endorsement or recommendation of the product or strategy. For more information about Praemium, including our disclosure documents, please visit our website.

We recommend that individuals seek professional financial advice before taking action.

Damian Cilmi:

Hi listeners, welcome to another episode of the Premium Investment Leaders podcast. I'm your host, Damian Cilmi, and today we are coming to you live from the 2025 Premium Alt Invest Forum, where we're chatting to Claire Smith before she gets up on stage to discuss private equity and about our guest, Claire Smith heads Schroeder's Capital Business in Australia, which covers all their private market solutions. With over 20 years experience, Claire's been involved in the development and implementation of structured finance initiatives, funds and investment solutions for both institutional and wholesale clients. Hi Claire, welcome to the program.

Claire Smith:

Thanks, Damien.

Damian Cilmi:

And glad to have you back again. This is probably the second or third time, I think, we've had you on, so it's great to see you again.

Claire Smith:

Yeah, thanks for having me.

Damian Cilmi:

And so we're recording. As I said, for our Alts Invest Forum, we're going to be talking about a lot of different strategies within this space, but you're here to talk about private equity in particular, and I think people used to think about private equities providing a lot of funding solutions for smaller to medium-sized companies, for venture or growth, but it seems like the deal sizes are getting bigger and bigger. So why you and Schroders? Why are you staying in the smaller end of the market?

Claire Smith:

Yeah, yeah, it's an interesting industry that's evolved quite a lot over the past 20 years. So 20 years ago it was mostly small cap funds and there was a bit of a joke that you do a consumer deal on a Monday, a healthcare deal on a Tuesday. But the market's really matured now and you've got a lot of specialisation. But also, through that journey, you've got a lot of successful funds that have grown very big and there's a lot of benefits to companies to remaining private as opposed to listing. You can make longer term strategic decisions around a board of directors, obviously, once the company is listed. You've got a lot of governance compliance issues. You've got quarterly earnings cycle ASX announcements if something happens.

Claire Smith:

So I think as the industry matured, companies were seeing this benefit of staying private for longer and so choosing to stay private. But what we find is just by the law of large numbers, it's much easier to double the size of a small company than it is to double the size of a large company. And what we're trying to do with our private equity fund and platform is really provide a diversifier to listed markets. So the bigger the companies get, even in the private space, the more correlated you become with listed markets because there becomes overlap and sometimes even you know the big guys are doing take privates of listed companies. So we really want to build a portfolio of companies that have idiosyncratic company risk in them in that small to mid-cap space and are generally decorrelated to both listed markets and GDP. And that's what I think we've built and delivered. Yeah.

Damian Cilmi:

I could see that. Yeah, no, that's very interesting. So we've seen an evolution in deal types from basic 10 years closed-end vehicles and now we've got a lot of innovation, as you can imagine, in this space. We've got co-invest, secondaries, continuation vehicles, et cetera, et cetera. How are you embracing all these new deal structures?

Claire Smith:

Yeah, we love them all, so we run. You know the business was built off traditional closed-end funds for institutional clients. We also manage a lot of mandates for a lot of big institutional clients as well, where we let them sort of pick their, choose their own adventure, if you will. But what we realised was there was a gap in the wealth space and so people who didn't have the ability or the desire to lock up their money for 10 years in these closed-end funds we built a solution with monthly applications and quarterly redemptions.

Claire Smith:

We obviously still highlight the fact that liquidity is a risk they're taking in this structure. So for our particular fund, it takes four to seven months to get to redeem. So we always try to make sure people come in eyes wide open. But we think we've struck a really good balance where they can get access to pure private equity with just a little bit of cash, obviously, but then still have that. We call it sort of you know, circumstantial liquidity. So if you want to buy a new house if you want to change your asset allocation a bit, the liquidity will be there.

Claire Smith:

But we do always warn if there's a GFC type environment and everyone hits exit at what we all know is the exact wrong time to exit any sort of fund, that's when there might not be liquidity there. But yeah, I mean. The semi-liquid fund, though, is only about 10% of our overall AUM. We still run 90% of all our private equity money in traditional closed-end funds and mandates.

Damian Cilmi:

And so with the semi-liquid, as some of these specific deal types, are they better suited to that semi-liquid vehicle.

Claire Smith:

Yeah, absolutely so. Our semi-liquid fund. So we invest across primaries, so other people's closed-end funds, and then we do direct co-investments and then continuation funds. But the semi-liquid fund has the lion's share of its assets in direct co-investments and continuation funds because they're fully funded on day one and because we have to manage all the liquidity within the fund. You can't really pack a semi-liquid fund with primary funds because they have following commitments within them and it's really hard to manage that cash balance. So 90% is in co-investments and secondaries.

Damian Cilmi:

Very interesting. That's good, and so I suppose Schroed is an allocator of capital as well through this. So you get to assess, you know, management quality of a number of existing and probably some newer, private equity general partners. So what are some of the characteristics that you seek before committing to a new GP?

Claire Smith:

Okay, yeah, so we like really specialisation. We want the managers to be specialised in the sectors that they invest into. So we have five key sectors healthcare, technology, business services, consumer and industrials. We sort of joke.

Claire Smith:

We want the manager to know more than what we know about those sectors Fair enough yeah, we know a lot, so usually they're specialised by sector and often by region as well. One of the things we particularly like and we don't shy away from is first-time funds, but ideally we want a first-time fund with a not quite first-time team. So often we find spinoffs are a really good way to access because you get individuals within funds that have, you know, done as I said. Each fund's a success. They raise bigger and bigger funds and start to graduate into the larger end of the market. But the small to mid cap segment has historically outperformed that. So some partners within the firm will realise actually I can earn more performance fees if I go back to my roots and go back to small to mid. So with that we like it, as I said.

Claire Smith:

But we do a lot of reference calls so they give us the list of all the companies they worked on. We find people who've worked in those companies and call them and say who sat on your board, who was actively involved in the day-to-day management of your business? We call you know colleagues from previous firms, what was this person like to work with? And you want to make sure that that team has the right skill set, has the right motivation.

Damian Cilmi:

But sometimes, yeah, on those first-time funds, if you get all those dynamics right, it can be very profitable, very interesting. It's something that I think a lot of listeners as well who are allocating to strategies themselves need to think about. You know, what are those characteristics? So great to hear your insights on that. Turning to, I suppose, a couple of portfolio ideas we've got Liberation Day, I think, coming up tomorrow, as it's been termed, so general feeling about that. So that's tariffs for people who may not know. It's a big day, I think, from Trump's presidency. So what are you feeling about that kind of tariff program coming through?

Claire Smith:

Make America great again? No, we do. Putting aside anyone's opinion on Trump, the good thing about the small to mid cap segment is these are the companies that are building the backbone of North America. So we invest in Europe, us and Asia within our fund. So these companies we're investing into are the type of companies that Trump wants to support and promote.

Claire Smith:

Also, being small to mid-cap, we're not really investing in companies that are doing international trade. They tend to be very much local to local businesses, especially Asia. Obviously, china is a bit of an interesting region at the moment, but always our thesis, in Asia as well, has been we want local businesses servicing local customers because we want those businesses to provide diversification again from other regions and markets. And as soon as you've got a company exporting to the US guess what? You're back to sort of having US exposure.

Claire Smith:

So these small to mid cap companies across Europe, north America and Asia, from a direct tariff perspective we're not too worried because, as I said, they're mostly local to local. Obviously, if the trade wars have a contagion effect and it affects the whole economy, then we're going to be affected through secondary factors like everyone else will. But on the whole, I think, as I said, the thesis of the platform has always been find good quality companies, enter them at attractive prices and let them grow from within. So grow or transform within is our motto. So again, if we've got all these bets across the world in these companies and they're not too correlated to GDP or affected by tariffs, hopefully that'll be resilient.

Damian Cilmi:

That sounds pretty logical and hopefully all plays out that way. There You're thinking about AI as well, because you do a lot in services, business services so everyone, I think, is scratching their heads like what's the best way to play AI? What are some of your learnings, I suppose, and where we think you can allocate to benefit from this?

Claire Smith:

Yeah, so we've got. Actually, the semi-liquid fund we market in Australia is mostly buyout, so mostly profitable, but it has a very small allocation to venture capital. It's got about 4% but we actually have a very strong venture capital team. So that's the longest strategy Tredis has been running in private equity. They've got a 28-year track record. So through our venture capital program, but that's mostly in closed-end funds because venture you need a lot of time and often follow on capital to make that you know, to see the company from gestation through to exit. So it doesn't quite suit the semi-liquid fund structure but nonetheless we've got it all in the ecosystem. So through that platform we've got investments in three of the four biggest AI companies in the world We've been exposed to.

Claire Smith:

I know everyone when they talk about AI now they mean the large language models but, obviously, ai has been around for 10 years in your Spotify algorithm and all those sorts of things, so we've got a lot of learnings from that team and that team helps sense check. If you've got a company saying, oh, we're going to use AI to improve this, they're pretty quick to know is that feasible or not. We do have one AI investment in the semi-liquid fund as well, a direct co -investment that we sourced through the venture capital team. That's a company called Scale AI that actually does data annotation for the large language models, so its clients are Nvidia, microsoft, openai, cohere, so we quite like that. It's almost like the picks and shovels of AI, if you will.

Claire Smith:

You're not taking a bet on which large language model is going to win them, because actually this company services all of the major AI companies, or large language model companies, if you will. So, yeah, another bit of an angle on it, but I think, as I said, having that venture capital knowledge within the firm, it helps a lot when we do diligence in companies. Because you know the joke, sell me this pen. It has AI. You know everyone's trying to.

Damian Cilmi:

At a premium.

Claire Smith:

I imagine as well too yeah. Exactly.

Damian Cilmi:

No, no, I could see like the real benefits of that platform from the venture capital. So it's really interesting. So, Claire, we'll probably wrap it up there.

Claire Smith:

Thank you very much for coming around and we'll speak to you again. Yeah, thanks so much Thanks.

Praemium:

Premium Limited is the issuer of the Investment Leaders and Advice Leaders podcasts. These podcasts are for promotional purposes only and aren't tailored to individual financial situations and do not contain financial advice. Views expressed by presenters may not align with premiums. For more information about premium, including our disclosure documents, please visit our website. We recommend that individuals seek professional financial advice before taking action.

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