The Best Deal I Ever Passed On

The teaser hit my inbox on a Wednesday afternoon, in my final stretch inside big private equity. A banker I knew was shopping a premium branded candy business. Roughly $30 million in sales. Growth of more than 80 percent versus the prior year, and the business had nearly doubled in each of the two years before that. It sold through wholesale, e-commerce, and direct to consumer, all running on one proprietary supply chain that sourced product from around the world.

Read that again as an operator. Three channels, one inventory backbone, and a brand that was capturing impulse purchases at thousands of points of sale while building its own e-commerce presence on the side. That is a platform.

The company wanted about $25 million to fund growth and take a small amount off the table. Control or minority, they were flexible. A real business with real momentum, a motivated seller, and an open structure.

I read it once and passed.

The Two-Sentence Pass

My reply took less time to write than the teaser took to read. I told the banker the business was too small for the check I needed to write. My minimum was $300 million.

Sit with that number for a second. The size of the fund behind me drove the pass, and nothing else. The business could have been the best risk-adjusted return in the country that day and my answer would have been the same.

And nobody in my seat would have done it differently. That is the part most people outside institutional PE never see. The pass was arithmetic. I never pulled up the financials. I never asked a single question about the supply chain or the customer concentration or the margin profile. The first number I looked at was the check size, and the conversation was over before it started.

Fund Math Is Not Deal Math

Here is the arithmetic. A large fund has a fixed amount of partner attention and a fixed number of deals it can responsibly execute. Diligence on a $25 million deal costs roughly what diligence on a $500 million deal costs. The lawyers cost the same. The quality of earnings costs the same. The investment committee process takes the same number of weeks. The board seats consume the same partner calendar for the next five years.

Now layer on deployment pressure. A fund of that scale has to put billions of dollars to work inside a defined investment period. Divide the fund size by the number of deals a team can actually manage and you get a minimum check, whether anyone writes it on a wall or not. Mine was $300 million. Below that line, the deal does not exist, because doing it would crowd out a deal that does move the fund.

So even if the small deal triples, the outcome rounds to zero at the fund level. A perfect outcome that does not move the fund is, institutionally speaking, a waste of the scarcest resource in the building: senior attention.

That means the first screen at scale is size. Quality only gets evaluated for the companies that survive it. Thousands of strong businesses get filtered out before anyone in the building ever sees them.

Big private equity passes on small companies for one reason: they are small. Thousands of strong businesses get filtered out before anyone ever sees them.

Paul W. Swaney III

What the Banker Heard

There is a second layer to this that took me years to appreciate. Bankers tier their buyer lists by check size, because their fee depends on running an efficient process. Once you pass on enough deals below your minimum, you stop receiving them. The market quietly re-sorts itself around your constraints.

Which means the institutional investor does not just pass on the lower middle market. Over time, the lower middle market stops calling. The deal flow you see becomes a mirror of the fund you sit in, and everyone inside the building mistakes that mirror for the market.

I was watching that happen to my own inbox, and it bothered me. The most interesting businesses I saw each quarter were the ones I was structurally forbidden to pursue. Founder-owned. Lightly banked. Growing faster than anything in our portfolio. Priced like nobody was competing for them, because mostly nobody was.

The Other Two Sentences

But my reply to the banker did not stop at the pass, and the second half mattered more than the first. I told him I was building a network of small cap and lower midcap relationships for when I transitioned out in a couple of years. Then I copied my personal email and asked him to continue the conversation there.

At that moment I had no fund, no mandate, no entity, and no timeline I could commit to. What I had was a conviction: the deals I actually wanted to do were the ones my seat forced me to decline. So every pass became a sourcing call. Every banker who brought me something too small got the same message. Keep them coming, and here is where to send them.

I did this for two years before I left. No tracker, no CRM, just a discipline. Answer every teaser. Decline with a reason. Tell them what I was building. Move the relationship to an address I would still own when the firm email shut off.

By the time I left, the pipeline existed before the firm did.

What This Means for a Fundless Sponsor

The lower middle market is full of companies exactly like that candy business. Too small for institutional capital, too interesting to ignore, and structurally underserved because the people with capital are forbidden to look.

As a fundless sponsor, I have no minimum check forcing my hand. I underwrite the business on its own math. There is no fund math to satisfy. If the company needs $25 million, I raise $25 million. If it needs $8 million, I raise $8 million. The deal decides the check size. Nothing else does.

There is a second advantage that gets less attention. Because I raise deal by deal, every investor in every transaction chose that specific company. Nobody is in the deal because a commitment made years earlier needs to be deployed on schedule. Every dollar behind me carries conviction in the asset itself.

That is the entire thesis, and I learned it by writing a two-sentence pass on a company I wanted to own.

The best companies I see today look exactly like the ones I had to turn down then. The difference is simple. Now I get to say yes.

Paul W. Swaney III is the founder of Swaney Group Capital, a fundless sponsor focused in the lower middle market.