As private equity tech funds and buyout valuations have ballooned, Nexa Equity LLC founder and managing partner Vlad Besprozvany said opportunities have arisen in the lower middle market.

“Over the past five or 10 years, a lot of firms have grown significantly,” said Besprozvany, a former investor at Insight Partners LLC and managing director at Greater Sum Ventures who launched Nexa in June 2021. It’s not just the larger players, such as Insight and Thoma Bravo LP, he said, but also a number of previously lower-middle-market specialists, such as K1 Investment Management LLC, Level Equity Management LLC, Serent Capital Management Co. LLC and Mainsail Management Co. LLC that have outgrown their launch mandates.

“These firms have increasingly been focused on investing in larger companies and writing larger checks,” he added. “By doing that, they’ve created a gap at the lower end of the market for new investors to enter with a focus on companies that are between $5 million to $15 million of revenue.”

Besprozvany and the Nexa team launched in June 2021 to pursue control or, in some cases, large-minority investments in application and fintech software at the lower end of the middle market. Recent investments include home contracting sales software company Leap LLC and AutoReturn, which develops software for towing and parking enforcement. Just months after Nexa’s investment, Leap announced a follow-on contractor software deal. The firm often works with founders in industries that have been slow to adapt technology.

“We felt like there was an opportunity to implement the same best practices that we saw in medium-size software companies and help founders scale from the $10 million revenue range to the $50 million revenue range,” he said.

In addition to Besprozvany, Nexa’s leadership includes Shelley Perry, a former Insight Partners operating partner who is a director and ex-CEO of digital file management company Bynder BV; Todd Cramer, a former Insight Partners investor who was vice president of growth and strategy for wireless networking company Ubiquiti Inc. (UI); and Joey Maloney, a veteran of enterprise software-focused sponsor Luminate Capital Partners.

Because Nexa is not as large as Insight Partners, TA Associates Inc. or Summit Partners, Besprozvany said the firm has to be much more thematic.

“Not only are we exclusively focused on application software and fintech — which excludes infrastructure software, security software, B2C software, and internet-digital media software — but within the application software and fintech category, we’ve identified 780 subsectors to focus on,” he said. “For example, a subsector is not as broad as ‘field services software’ but more specifically ‘software for roofing contractors,’ similar to where Leap focuses.”

Nexa took a majority stake in Leap in December. The Columbia, Md., company develops sales software for contractors that helps manage steps from estimating bills to financing and signing contracts with electronic signatures. CEO and founder Patrick Fingles first built the software internally at his construction company to increase productivity and then saw the broader market. Leap made its first acquisition since Nexa’s investment with the March 10 purchase of JobProgress LLC, a Middlesex, N.J., company that provides customer-relationship management and project workflow software to home contractors.

In August 2021, Nexa invested in San Francisco company AutoReturn.

The portfolio company, which is formally named Tegsco LLC, develops software-as-a-service applications to manage towing and parking enforcement for major cities such as San Francisco, San Diego and Philadelphia. AutoReturn says its software processes more than half a million tows annually.

As with Leap, AutoReturn founder John Wicker remains an investor. Willkie Farr & Gallagher LLP and Kirkland & Ellis LLP advised Nexa on the Leap and AutoReturn deals.

“We like to invest in markets that have been behind the curve in terms of technology adoption,” Besprozvany said, adding that Nexa looks for software that can automate manual processes that are “inefficient, painful or costly” for customers, with a sweet spot in business-to-business application software and fintech.

As Leap and AutoReturn reflect, Nexa likes working with founders.

“The founders we partner with tend to think of it as two bites of the apple,” Besprozvany said.

“We provide them some liquidity upfront at the sale of the business,” he said. “They participate in the operational upside while continuing to stay involved in the business, and in the economic upside while continuing to grow their equity alongside ours.”

While the investment horizon is case dependent, Nexa typically underwrites to a three- to five-year hold period.

Being the first institutional investor presents low-hanging fruit from an operational improvement standpoint.

“We can say: ‘Here are the areas where your team may be lacking. Let us help hire a great CFO,'” he said. “‘Let’s start tracking metrics that maybe you hadn’t been tracking before, like retention and cohort behavior. Let’s think about pricing and bundling and packaging. Let’s evaluate how product development ties into financial performance.’”

M&A strategy and execution also present opportunities. “A lot of the companies we talk to would like to consider M&A, but don’t have the capital — or more importantly — the expertise internally to identify, do due diligence and execute add-on acquisitions,” he said. “We often function as an outsourced corp-dev team for our portfolio companies.” Leap’s purchase of JobProgress reflects the added deal-making capacity.

Nexa typically invests in companies that are profitable or are breaking even and are growing revenue at 25% to 75%.

“They don’t need total rebuilding and they have product market fit, but they are typically not growing fast enough for venture capitalists,” Besprozvany said.

The firm manages portfolio companies to optimize either revenue and revenue growth, or profitability. “Depending on the market, on the company and on the specifics of that investment, we’ll focus on one or the other, but typically not both,” he said. “If you try to do both at once, you’re probably not going to do a great job at either.”

Besprozvany said that when the time is right, Nexa will consider the full range of alternatives for exiting investments. Though Nexa did not comment further on potential exits, if a portfolio company reach the $50 million revenue threshold, it will not likely be ready for an IPO. A sale to a strategic or a sponsor — maybe even a firm that moved from the lower middle market to larger quarry — would be a possibility.

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