Middle Market Outlook: Middle Market Competition is fierce, coming from all constituents like independent sponsors, family offices with dedicated PE efforts, and also from Strategics who are participating far down below their league. The trillions of dollars in PE funds raised in the last four years now in search of deals, along with the Consumer Confidence Index reaching its peak since December 2000 positively impacts the valuation of private companies. Plenty of groups are willing to pay rich multiples for companies despite critical risk factors like product service concentration, challenging capital structures, and significant customer concentration. However, the only thing that can possibly dampen this trend will be legislative gridlocks if the Trump Administration tries to enact more economic and tax reforms. The valuations for companies in the middle market are frothy and these companies have more add-on activities, allowing them to mitigate the high value that they may have paid on their platform. Changing management quicker than talent transitions in the past is another trend to observe. PE firms are trying to capture synergies that they might be able to tackle, like Bain is creating shadow portfolios and tracking business plans for those companies that they don’t actually own but acquire once they enter the market. Middle market companies are required to complete due diligence, which is a strain on them, and as a result, PE firms are trying to get expense reimbursements on their diligence efforts.




Deal Flow – Sourcing and Funding: Though markets are consolidating, the middle market is highly fragmented, with many layers below the Strategics being almost empty, and lower middle markets, with relatively low multiples, try to add-on and reach attractive levels for Strategics. For niche industries like waste management, where the majority of deal source is direct, deal sourcing is not always executive-driven, as sales managers and operations managers in the field are the ones who take the lead. Sponsors are more concerned with preserving the vision, retaining core values and strategic plans. The relationship between PE firms and investment advisors is prudent in positioning themselves in management presentations, as to decide if the PE firm is a credible buyer.




Deal Closing: PE firms are incorporating third party resources, spending more time evaluating relationship dynamics between and among the senior management team in order to get an assessment of the capabilities and talent of the CEO in executing a vision. From a sell-side perspective, quality of earnings before the sale is the key to smoothly pass through the diligence and Quality of Voice (QoV) is always better to be performed if it balances the costs. Time to close deals from financing side is lengthy, with the volume of legal documents, inter-credit documents, and ancillary documents, which take a while. On the deal side, with second- or third-generation businesses,




emotions set in as one gets closer to closing the deal, which might not work out in their favor all times. Reps and Warranty Insurance are being used extensively to ensure the closing of deals. Right now, financing markets are attractive as ever,due to a low interest rate environment coupled with significant deal volume, as non-banks are getting more aggressive than regulated banks with have ceiling issues.





Value Creation: Firms are laying out very detailed acquisition-integration plans that cover all functional areas–HR, Operations, Risk, and Environmental– and depending on size and complexity of the deal, continue to ensure all synergy assumptions are in place, and run through integration. Portfolio companies need to fully understand the marketplace and document the management team’s philosophy that is differing with the market trends and determine the ideal amount of leverage required to achieve desired results. The management team has a tremendous relationship with PE partners, with support in understanding market dynamics through financial modelling/engineering and help through their strategic view. Portfolio companies figure out ways to cut costs and support the growth of small companies by rebranding, upgrading websites,and acquiring PEs investments. Focus is on IT spending, work with outside consultants on supply chain optimization, and ensuring that their platform is scalable, following the kaizen (“continuous improvement”) process by improving their processes, adding line of businesses, and increasing geographical presence.






Exit: Holding periods are shortening from 6.1 years in 2014 to 5.3 – 5.1 years right now, and salaries are taking advantage of the frothy multiples. But that trend is expected to reverse, as during boom, the PEs with portfolio companies paid up with multiples and now probably need those assets to mature a little longer. Holding periods depend on the position of a company in the business cycle, as every deal is different depending on the industry, and when inevitable decline comes, holding periods will lengthen . Growth is the frontrunner leading to potential exit opportunities as compared to EBITDA optimization, and showing stronger organic growth and a clear roadmap goes a long way in the sale, which also helps the future buyers. Despite positive comments on markets since the election, the IPO market has been depressed. YTD, there’s been 25 IPOs, which is down by 200% as compared to this time last year, with a lot of IPOs happening in the energy and infrastructure space. Private markets are becoming more developed, in order to get liquidity to investors or capital for growth, who don’t have to necessarily access public markets and can instead go through private rounds. M&A outlook is expected to increase for the current year as compared to last year.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s